Interest Rate Swap Attribution Across Curve and Credit Risk Factors

Summary

The document asks whether interest rate swap returns can be decomposed in a manner similar to bond attribution. The response recommends organizing the analysis around risk factors that explain changes in value. For yield curves, it highlights movements in level, slope, and curvature, linking these to parallel rate exposure, twists, and bends in the curve.

It also identifies credit spreads as possible contributors because interbank rates are not risk-free, and suggests considering both short-term and longer-term spread measures. Coupon income is another component, while curve roll-down and changes in liquidity premia as cash flows pass key market points may also affect performance. The response provides a factor checklist rather than a fully specified attribution equation or measurement procedure. Actual attribution depends on the swap’s cash flows, valuation framework, curve construction, and selected risk factors; the suggested spread measures are examples rather than a universal set.

Key ideas

• Swap attribution can be organized around yield-curve level, slope, and curvature changes.
• Level exposure is associated with parallel rate sensitivity, while slope and curvature capture other curve movements.
• Credit spread movements can affect swaps because interbank rates include credit risk.
• Coupon income, curve roll-down, and liquidity premia may contribute to performance attribution.

Tags

# Interest rate swap performance attribution


# Interest rate swap performance attribution












I have learned some attribution models such as Campisi. It decomposes the return of bond into treasury return, spread return, and coupon return. It works like: $$r = y\times dt - D \times dy_\text{treasury} - D \times dy_\text{credit}$$

Can an interest rate swap be decomposed in a similar way?

## Answer by kurtosis (score 2)

https://quant.stackexchange.com/a/57123

You can decompose swap returns this way although I would argue that you should think more in terms of risk factors. For most any fixed income instrument (and especially for swaps), we often break exposure into three types of yield curve movements which explain the most variation, aka the Litterman and Scheinkmman (1991) factors:

- Changes in level (equivalent to DV01);

- Changes in slope; and,

- Changes in curvature (aka butterflying or bowing).

In addition, you have credit concerns since interbank rates are not risk-free; thus, you could look at a short-term credit spread like the TED spread (which can help indicate different states of the economy) and a longer-term credit spread like the Moody's yield of 10-year Baa corporates over 10-year US Treasuries.

Your coupon return is easy to calculate; however, you should also calculate a component for change due to rolling down the curve (as noted in a comment). Finally, you might also account for when certain cashflows roll past more liquid points on the curve to account for liquidity premia.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.