An Empirical Analysis of Pricing in the Japanese Bond Markets….Image.Marked.pdfVIP

An Empirical Analysis of Pricing in the Japanese Bond Markets* Using asset swap spreads to identify relative-value of fixed-income Toyoharu Takahashi† Abstract Both in the theoretical and applied literature of finance the difference in yield-to-maturity between corporate bonds and government bonds has been used as a measure of the risk of the former over the latter. While this approach has sometimes provided interesting results, the usefulness of yield spreads is lessened by ignoring the term structure of interest rate. This paper presents an alternative measure, “Asset swap spread”, use asset swaps to convert fixed income cash flows to floaters which refer LIBOR plus spread as index coupon rate. This spreads show much broader characteristics as well as riskiness of each corporate and government bonds. Effectively by using the swap curve to create a set of equal and opposite fixed-rate cash flows, we create a synthetic floating rate note (FRN) with an index coupon rate. Moreover, this value is now being captured through the trading of bond asset swap packages. Based on these ideas,  We provide an introduction to government and corporate bond asset swaps, explaining their basic mechanics  The use of asset swap spreads in identifying and capturing relative value is discussed  The market drivers of asset swaps spreads are examined Keywords: fixed income, asset swap spread, Japanese bond markets JEL classification: G12, G13 * This paper is a part of research which was supported by a Grant-in-Aid for Scientific Research from Japan Society for the Promotion of Science. Earlier version of this paper was presented at the annual