Volume 14 | Issue 4 | Article 1
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What is so Special about KOSPI 200 Index Futures Contract? An Analysis of Trading Volume and Liquidity
This paper investigates to what extent liquidity, credit, and market volatility determine swap spreads dynamics. We find that the liquidity factor plays the leading role and renders significantly negative impacts on swap spreads. This finding stands in line with the prevailing view among swap traders that swap spreads serve mainly as an indicator of market liquidity. Meanwhile, to a certain extent the results demonstrate the importance of credit risk and market volatility in valuing the swap contract. In particular, the GARCH-based realized volatility, as opposed to implied volatility extracted from option prices, is found to exert pronounced influence on the variations of swap spreads in the short-run horizon.
