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Korean Journal of Financial Studies 2010;39(1):59-101.
Published online March 31, 2010.
An Empirical Study of KRW Interest Rate Swap Market: Focused on "Mispricing" Compared to Theoretical Fair IRS Rates and Arbitrage Opportunities
Han Bok Choi, Bon Il Ku, Young Ho Eom
원화 이자율 스왑 시장에 대한 실증연구
최한복, 구본일, 엄영호
Abstract
One of the well-established facts in the term structure literature is that IRS rates are higher than their treasury counterparts while its contractual provisions such as no principal exchange render them lower compared to par bond yields of LIBOR bank notes. In the Korean fixed income market, however, KRW IRS rates have persistently been lower than KTB yields, let alone those of the AAA bank notes. To investigate the puzzle in a more normative and quantitative manner, we estimate theoretical ``fair`` KRW IRS rates under no arbitrage conditions using a 3-factor affine term structure model. Then, we examine the extent of ``mispricing``, which measure deviations of the actual rates from the theoretical ones. Next, we identify a set of demand-supply factors and examine the ``lead-lag`` relationship among the factors and the mispricing through Granger-causality testing procedure. We find that the deviations range from 23.7bp for 1 year maturity to as large as 38.79bp for 5 year maturity. And the Granger-causality tests show that the factor constructed as KRW/USD CRS rate less KRW IRS rate has the most significant impact on the mispricing while the influence of the spread between KRW IRS rates and USD IRS rates is more pronounced in the first half of the sample period.
Key Words: 3요인 선형 기간구조 모형,3-Factor Affine Term Structure Model,스왑 차익거래,스왑스프레드,이자율 스왑,차익 거래 제약,Interest Rate Swap,Limit of Arbitrage,Swap Arbitrage,Swap Spread
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