ABSTRACT
This chapter suggests how a position of equilibrium is reached from an initial position of disequilibrium and shows how the equilibrium set of bond yield spreads and swap rates might change through time under the influence of change in the economic environment. It explores how in the process new issue markets for certain types of securities might become alternatively closed and open. Ceteris paribus changes are rarely met with in practice, even though they are a popular expository tool in arbitrage statics. Often it is events more than one market which disturbs a situation of initial equilibrium and set off a dynamic process towards new market equilibrium. Independence is measured by the capacity of the swap market to absorb arbitrage inflows. The non-existence of an active market in United Kingdom corporate debt means that a fall in the swap rate does not trigger arbitrage demand from A-rated corporations switching from the fixed-rate new issue market to the swap market.
