STRUCTURAL RELATIONSHIPS BETWEEN SEMIANNUAL AND ANNUAL SWAP RATES

Abstract

This study investigates the long-run stochastic properties of semiannual and annual swap rates in the framework of cointegration methodology. Initial exploratory tests show that both semiannual and annual swap rates exhibit nonstationarity, which makes it logical to use cointegration methodology. Short- and long-term relationships between semiannual and annual swaps' bid and offer rates are reported for all maturities. We investigate whether semiannual and annual interest rate swap markets are segmented or integrated. The information derived from the analysis sheds light on linkages and informational flows between semiannual and annual swap markets.