Intermediation and the market for interest rate swaps

Tim S. Campbell, William A. Kracaw

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

This paper analyzes the role of financial intermediaries as marketmakers in the market for interest rate swaps. We argue that intermediaries which hold large nontraded portfolios of swaps are efficient alternatives to direct hedging by counterparties in publicly traded cash and futures instruments. The efficiency afforded by the swap marketmaker derives from reduction in transactions costs, diversification of basis risk, and reduced agency costs of debt. The analysis provides an explanation for the existence and success of the swaps market as a means for spreading risk and for its dominance by large financial institutions.

Original languageEnglish (US)
Pages (from-to)362-384
Number of pages23
JournalJournal of Financial Intermediation
Volume1
Issue number4
DOIs
StatePublished - Dec 1991

Fingerprint

Interest rate swaps
Swaps
Intermediation
Diversification
Financial institutions
Transaction costs
Hedging
Cash
Financial intermediaries
Agency costs of debt
Intermediaries
Basis risk

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this

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Intermediation and the market for interest rate swaps. / Campbell, Tim S.; Kracaw, William A.

In: Journal of Financial Intermediation, Vol. 1, No. 4, 12.1991, p. 362-384.

Research output: Contribution to journalArticle

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