The market liquidity of interest rate swaps

This paper studies market liquidity in interest rate swaps before and during the globaltightening of monetary policy starting in June 2022. Interest rate swaps constitute thesingle largest derivatives segment globally and account for a large share of centrallycleared instruments. Banks and pension funds rely extensively on interest rate swapsto hedge interest rate risk. Hence, understanding this market and the drivers of market liquidity is a key research problem in the current market context. We use priceand volume data from around 338 000 centrally cleared trades in the most activelong-horizon swap contract denominated in euros to construct seven liquidity measures. Taking a comprehensive approach, we apply linear regressions to determinethe drivers of variation in liquidity. Our liquidity measures are significantly related tomonetary policy, market-wide fixed-income liquidity, Euro Interbank Offered Ratevolatility and dealer behavior.