When and How US Dollar Shortages Evolved into the Full Crisis? Evidence from the Cross-Currency Swap Market

Baba, Naohiko; Sakurai, Yuji

doi:10.2139/ssrn.1456381

Cited by 3 publications

(4 citation statements)

References 43 publications

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“…1 The swap size should be optimized to fit the mutual trade and investment and should draw attention from both policymakers and academia (Aizenman et al, 2011;Baba and Sakurai, 2011). Therefore, an analytical understanding of the factors that drive swap size is valuable to practitioners.…”

Section: Introductionmentioning

confidence: 99%

Optimal size of currency swap between central banks: evidence from China

Yang¹,

Han²

2013

Applied Economics Letters

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Currency swaps are used by central banks to provide short-term liquidity to help enhance financial stability for both counterparts. We apply the newsboy inventory optimization to interpret the factors related to the optimal size of a currency swap, and we find that the mean value of foreign exchange demand, its volatility and the distribution form are important for the optimal swap size. Empirical studies regarding swap arrangements between China and its trading partners show that total trade volume and its long-term SD are robust explanatory variables.

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Section: Introductionmentioning

confidence: 99%

Optimal size of currency swap between central banks: evidence from China

Yang¹,

Han²

2013

Applied Economics Letters

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“…Finally, to identify the starting date of crisis or turmoil in CIP deviations, this paper closely follows the method used in Baba and Sakurai (2011) and identifies the dates of regime switches in the time series of CIP deviations. González-Hermosillo and Hesse (2009) use a Markov regime-switching technique with three different volatility states (low, medium and high) and show that the euro-dollar FX swap market entered the high volatility state immediately after the collapse of Lehman Brothers in September 2008.…”

Section: Literature Reviewmentioning

confidence: 99%

Dislocations in the Won‐dollar Swap Markets During the Crisis of 2007–2009

Baba¹,

Shim²

2014

Int. J Fin Econ

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We analyse dislocations in the foreign exchange swap and cross-currency swap markets between Korean won and US dollar from 2007 to 2009. A regime-switching analysis of deviations from covered interest parity (CIP) identifies a crisis period starting in June 2007. Using an EGARCH model, we find that volatility index and the credit default swap spreads of Korean and US banks are the main factors explaining CIP deviations. We show that the Bank of Korea's US dollar loans of the proceeds of swaps with the US Federal Reserve were effective in reducing CIP deviations, whereas the provision of funds using its foreign reserves was not. Copyright © 2014 John Wiley & Sons, Ltd. 1 When foreign banks' lending to these countries contracted sharply around the fourth quarter of 2008, domestic banks faced difficulties in borrowing in the interbank market as well as much higher costs in obtaining short-term dollar (or euro/Swiss franc in central and eastern Europe) financing through FX swaps. 2 In particular, many of these banks experienced an abrupt drop in gross international claims, which are the sum of cross-border claims in all currencies and local claims in foreign currencies of international banks. 3 To ameliorate the dislocations in their FX swap and cross-currency swap markets, central banks in western Europe (Denmark, Sweden, Switzerland, the United Kingdom, and the euro area (for the European Central Bank)), North America (Canada), Asia (India, Japan, Korea and Singapore), Latin America (Brazil, Chile and Mexico), central and eastern Europe (Poland and Hungary) and the Pacific (Australia and New Zealand) either used their own foreign reserves or established swap lines with the US Federal Reserve (Fed) or other central banks.Like many other emerging market economies, Korea relies heavily on US dollar funding through foreign banks and investors, but it does not have deep FX swap and cross-currency swap markets. This turned out to be a major vulnerability during the recent financial crisis, as Korea experienced the most severe dislocations in the FX swap market of any emerging market economy. In response, the Korean authorities took several measures to stabilise their foreign currency funding market. In particular, they drew on Korea's swap line with the Fed and used the country's own foreign reserves to provide foreign currency liquidity to the private sector. Korea's experience thus provides useful lessons on the effectiveness of these two different policies in mitigating foreign currency funding problems. INTERNATIONAL JOURNAL OF FINANCE & ECONOMICSInt. J. Fin. Econ. 19: 279-302 (2014) Published online 14 March 2014 in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002DOI: 10. /ijfe.1492 In this paper, we examine what are the determinants of deviations from covered interest parity (CIP deviations) in the won-dollar swap markets between January 2005 and December 2009. We are especially interested in whether the aforementioned two policies adopted during the recent crisis were effective in alleviati...

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“…Financial institutions mainly use swaps to meet their foreign currency funding needs. As Baba and Sakurai (2011) show, the EUR/USD crosscurrency swap is quoted as Euribor plus a basis points against USD Libor. Here, the more negative the value of a is, the higher the demand for USD liquidity relative to EUR.…”

Section: Introductionmentioning

confidence: 99%

“…Investigating the interaction between the Foreign Exchange (FX) swap and cross-currency swap prices, Baba (2009) identified a significant linear causality from the former to the latter. Baba and Sakurai (2011) argued that credit spreads between the US and European financial institutions had significant predictive power for the crisis regime, which they uncovered in the 1-year and 10-year crosscurrency swap markets between the USD and three major European currencies.…”

Section: Introductionmentioning

confidence: 99%

Dynamic linkages among cross-currency swap markets under stress

Tamakoshi

Hamori

2013

Applied Economics Letters

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This article examines the impacts of the European sovereign debt crisis on the Dynamic Conditional Correlation (DCC) between three European currencies (EUR, CHF and GBP) and the US dollar for 1-year maturities. We found that the correlation between each pair of the swap prices significantly fluctuated over time and exhibited a higher co-movement during the crisis period, suggesting a higher degree of market integration. Importantly, applying a linear regression framework with a crisis dummy variable to the derived DCC, we find evidence of spillover effects of the sovereign debt turbulence to the cross-currency swap markets, as reflected in the increased co-movement between the EUR/USD and CHF/USD swap prices.

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When and How US Dollar Shortages Evolved into the Full Crisis? Evidence from the Cross-Currency Swap Market

Cited by 3 publications

References 43 publications

Optimal size of currency swap between central banks: evidence from China

Optimal size of currency swap between central banks: evidence from China

Dislocations in the Won‐dollar Swap Markets During the Crisis of 2007–2009

Dynamic linkages among cross-currency swap markets under stress

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