Low-frequency volatility of yen interest rate swap market in relation to macroeconomic risk

Azad, A. S. M. Sohel, Fang, Victor and Wickramanayake, J. 2011, Low-frequency volatility of yen interest rate swap market in relation to macroeconomic risk, International review of finance, vol. 11, no. 3, pp. 353-390, doi: 10.1111/j.1468-2443.2011.01129.x.

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Title Low-frequency volatility of yen interest rate swap market in relation to macroeconomic risk
Author(s) Azad, A. S. M. SohelORCID iD for Azad, A. S. M. Sohel orcid.org/0000-0002-8853-7157
Fang, VictorORCID iD for Fang, Victor orcid.org/0000-0001-8914-3363
Wickramanayake, J.
Journal name International review of finance
Volume number 11
Issue number 3
Start page 353
End page 390
Total pages 38
Publisher Wiley - Blackwell Publishing Asia
Place of publication Richmond, Vic.
Publication date 2011-09
ISSN 1369-412X
Keyword(s) volatility (finance)
interest rates
capital market
value at risk
price indexes
economic structure
foreign exchange
Summary Using ‘low-frequency’ volatility extracted from aggregate volatility shocks in interest rate swap (hereafter, IRS) market, this paper investigates whether Japanese yen IRS volatility can be explained by macroeconomic risks. The analysis suggests that this low-frequency yen IRS volatility has strong and positive association with most of the macroeconomic risk proxies (e.g., volatility of consumer price index, industrial production volatility, foreign exchange volatility, slope of the term structure and money supply) with the exception of the unemployment rate, which is negatively related to IRS volatility. This finding is fairly consistent with the argument that the greater the macroeconomic risk the greater is the use of derivative instruments to hedge or speculate. The relationship between the macroeconomic risks and IRS volatility varies slightly across the different swap maturities but is robust to alternative volatility specifications. This linkage between swap market and macroeconomy has practical implications since market makers and hedgers use the swap rate as benchmark for pricing long-term interest rates, corporate bonds and various other securities.
Language eng
DOI 10.1111/j.1468-2443.2011.01129.x
Field of Research 149999 Economics not elsewhere classified
Socio Economic Objective 970114 Expanding Knowledge in Economics
HERDC Research category C1.1 Refereed article in a scholarly journal
Copyright notice ©2011, Wiley-Blackwell Publishing Asia
Persistent URL http://hdl.handle.net/10536/DRO/DU:30042538

Document type: Journal Article
Collections: School of Accounting, Economics and Finance
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