Interest Rate Swap Market Complexity and Its Risk Management Implications

Author:

Yang Steve Y.1ORCID,Onur Esen2

Affiliation:

1. School of Business, Stevens Institute of Technology, 1 Castle Point on Hudson, Hoboken, NJ 03070, USA

2. Office of Chief Economist, Commodity Futures Trading Commission, 1551 Lafayette Center, Washington, DC 20581, USA

Abstract

The primary objective of this paper is to study the post Dodd-Frank network structure of the interest rate swap market and propose a set of effective complexity measures to understand how the swap users respond to market risks. We use a unique swap dataset extracted from the swap data repositories (SDRs) to examine the network structure properties and market participants’ risk management behaviors. We find (a) the interest rate swap market follows a scale-free network where the power-law exponent is less than 2, which indicates that few of its important entities have a significant number of contracts within their subsidiaries (a.k.a. interaffiliated swap contracts); (b) swap rate volatility Granger-causes swap users to increase their risk sharing intensity at entity level, but market participants do not change their risk management strategies in general; (c) there is a significant contemporaneous correlation between the swap rate volatility and the underlying interest rate futures volatility. However, interest rate swap volatility does not cause the underlying interest rate futures volatility and vice versa. These findings provide the market regulators and swap users a better understanding of interest rate swap market participants’ risk management behaviors, and it also provides a method to monitor the swap market risk sharing dynamics.

Funder

CFTC

Publisher

Hindawi Limited

Subject

Multidisciplinary,General Computer Science

Cited by 1 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. Diverse Causality Inference in Foreign Exchange Markets;International Journal of Bifurcation and Chaos;2021-04

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