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Cross-currency basis swap spreads and corporate dollar funding

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  • David-Pur, Lior
  • Galil, Koresh
  • Rosenboim, Mosi
  • Shapir, Offer Moshe

Abstract

This study examines the failure of covered interest parity (CIP) in long-term cross-currency basis swap (CCBS) markets. We conjecture that frictions in corporate bond markets urge firms to raise funds in one market and enter a CCBS contract to exchange the debt in a different currency. Therefore, frictions in the corporate bond market explain the failure of CIP in the long-term CCBS market. We illustrate this idea using a simple theoretical model and then explore the determinants of CCBS spreads, and demonstrate the links between corporate funding needs and the long-term CCBS market. Furthermore, we show that frictions (illiquidity in the banking sector) and credit risk are essential drivers of CCBS spreads during economic stress.

Suggested Citation

  • David-Pur, Lior & Galil, Koresh & Rosenboim, Mosi & Shapir, Offer Moshe, 2023. "Cross-currency basis swap spreads and corporate dollar funding," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:intfin:v:85:y:2023:i:c:s1042443123000483
    DOI: 10.1016/j.intfin.2023.101780
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    More about this item

    Keywords

    Covered interest rate parity; Cross-currency basis swaps; Cross-currency swaps; Bond markets;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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