Determinants of UK swap spreads

The main factors which drive swap spreads are interest rates, credit risks and liquidity risks. The study uses UK data from 1 January 2001 to 30 June 2004 to analyse the components of interest rate swap spreads. This paper updates previous empirical evidence and considers if different economic and market conditions can have an impact on determinants of swap spreads. It is found that the level and slope of interest rates are significantly positively related to UK swap spreads for most maturities. This differs from previous empirical evidence. It is concluded that differing economic and market conditions can have an impact on swap spreads. Consistent with previous evidence a positive relation between the default risk factor and swap spreads is also found and the liquidity premium is positively related to UK swap spreads for medium- and long-term swap spreads