Finance Guest Seminar: Urban Jermann
The Carlson Finance department welcomes Urban Jermann, from the University of Pennsylvania, to present his work:
Title: Negative Swap Spreads and Limited Arbitrage
Since October 2008 fixed rates for interest rate swaps with a thirty year maturity
have been mostly below treasury rates with the same maturity. Under standard assumptions
this implies the existence of arbitrage opportunities. This paper presents a
model for pricing interest rate swaps where frictions for holding bonds limit arbitrage.
I show analytically that negative swap spreads should not be surprising. In the calibrated
model, swap spreads can reasonably match empirical counterparts without the
need for large demand imbalances in the swap market. Empirical evidence is consistent
with the relation between term spreads and swap spreads in the model. Keywords:
Swap spread, limited arbitrage, fixed income arbitrage (JEL: G12, G13).