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Can the choice of interpolation method explain the difference between swap prices and futures prices?

journal contribution
posted on 2005-07-01, 00:00 authored by R Brown, Victor Fang
The standard model linking the swap rate to the rates in a contemporaneous strip of futures interest rate contracts typically produces biased estimates of the swap rate. Institutional differences usually require some form of interpolation to be employed and may in principle explain this empirical result. Using Australian data, we find evidence consistent with this explanation and show that model performance is greatly improved if an alternative interpolation method is used. In doing so, we also provide the first published Australian evidence on the accuracy of the futures-based approach to pricing interest rate swaps.

History

Journal

Accounting and finance

Volume

45

Issue

2

Pagination

199 - 216

Publisher

Wiley - Blackwell Publishing Asia

Location

Richmond, Vic.

ISSN

0810-5391

eISSN

1467-629X

Language

eng

Notes

Article first published online 31st May 2005

Publication classification

C1.1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2005, AFAANZ

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