Duffie, Darrell and Kenneth J. Singleton, "An Econometric Model of the Term Structure of Interest-Rate Swap Yields", Journal of Finance, Vol. 52, No. 4, (September 1997), pp. 1287-1321.
Abstract: This article develops a multi-factor econometric model of the term structure of interest-rate swap yields. The model accommodates the possibility of counterparty default, and any differences in the liquidities of the Treasury and Swap markets. By parameterizing a model of swap rates directly, we are able to compute model-based estimates of the defaultable zero-coupon bond rates implicit in the swap market without having to specify a priori the dependence of these rates on default hazard or recovery rates. The time series analysis of spreads between zero-coupon swap and treasury yields reveals that both credit and liquidity factors were important sources of variation in swap spreads over the past decade.
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