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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Counterparty Credit Risk in Interest Rate Swaps during Times of Market Stress
Antulio N. Bomfim

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.

Keywords: Convexity adjustment, futures and forward rates, affine models, calibration

Full paper (647 KB PDF)

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Last update: March 24, 2003