An empirical examination of the convexity bias in the pricing of interest rate swaps

• 成果类型: Article
• 署名作者: Gupta, A; Subrahmanyam, MG
• 署名单位: New York University; University System of Ohio; Case Western Reserve University
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/S0304-405X(99)00051-3
• 发表日期: 2000
• 页码: 239-279
• 关键词: convexity; interest rate swaps; interest rate futures; forward rate agreements; term structure models

摘要

This paper examines the convexity bias, caused by the non-linearity of payoffs, in the pricing of interest rate swaps off the Eurocurrency futures curve. The evidence from four major currencies - $, pound, DM and Yen - during 1987-1996 suggests that swaps were initially being priced off the futures curve (ignoring the convexity adjustment); subsequently, the market swap rates drifted below the rates implied by futures prices. After rejecting alternative explanations, we use alternative term structure models to show that the convexity bias is related to the empirically observed swap-futures differential. We interpret these results as evidence of mispricing of swap contracts during the early years, which was eliminated over time. (C) 2000 Elsevier Science S.A. All rights reserved. JEL classification: G13; G14.