A Two-Factor Model of the Term Structure of the Swap Spread with Stochastic Volatility

Joon-Hee Rhee; 박수천; 김재윤

This paper develops a two-factor model of the term structure of the swap spread. In our model, the swap spread depends on 1) the instantaneous swap rate as the first factot and 2) the stochastic volatility of the swap spread as the second factor. We propose the closed form solution of swap spread from the chosen two factors. We estimate the stochastic volatility from the GARCH(1,1) model. We also test our model by using GMM based on the cross sectional data. The empirical result shows that the volatility is not significant for explaining the term structure of swap spread, but the first factor model has the explanatory power for the term structure of swap spread in Korean market.

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REFERENCES (19)
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* 2022년 이후 발행 논문의 참고문헌은 현재 구축 중입니다.

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