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The Persistence of Negative Swap Spread and the Efficiency of Bond Market - The Role of Arbitrage Trading between Spot and Interest Rate Swap -

  • Journal of Insurance and Finance
  • 2009, 20(3), pp.97-124
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

SEUNG YEON WON 1,  Sang Buhm Hahn ORD ID 2

1영남대학교
2경기대학교

Accredited

ABSTRACT

This paper shows that the persistence of negative swap spread in Korea is partly attributed to the lack of arbitrage trading which may counteract the negative swap spread, using Threshold Autoregressive model. However, according to the empirical test, the negative swap spread is not the proof that there is no market efficiency in Korean bond and interest rate swap market. Rather, it may be inferred that the transaction cost or some constraints against arbitrage trading set the limit to the arbitrage trading so that it could not be executed fully enough to decrease the negative swap spread. This paper suggests that the government should advance the market system as well as deregulate the bond market for enhancing the market capabilities to correct the bias from outside shocks.

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