Keywords: Convexity adjustment, futures and forward rates, affine models, calibration
Abstract: This paper examines whether empirical and theoretical results
suggesting a relatively small role for counterparty credit risk in
the determination of interest rate swap rates hold during periods of
stress in the financial markets, such as the chain of events that
followed the Russian default crisis of 1998. The analysis sheds
light on the robustness of netting and credit enhancement
mechanisms, which are common in interest rate swaps, to widespread
turmoil in the financial markets.
Full paper (647 KB PDF)
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Last update: March 24, 2003