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When and how US dollar shortages evolved into the full crisis? Evidence from the cross-currency swap market

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  • Baba, Naohiko
  • Sakurai, Yuji
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    Abstract

    This paper investigates when and how the US dollar shortages evolved into the full crisis in the cross-currency swap market between major European currencies and the US dollar during the turmoil of 2007-2009, using the dynamic factor model with regime-switching [beta] coefficients of each swap price with respect to the latent common factor. The 1-year market entered the high-[beta] crisis regime soon after the onset of the subprime problem in August 2007. The 10-year market entered that regime following the collapse of Bear Sterns in mid-March 2008. Financial credit spreads have significant predictive power for switches between high and low-[beta] regimes.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 6 (June)
    Pages: 1450-1463

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:6:p:1450-1463

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Global financial crisis US dollar shortage Currency swap Dynamic factor model Regime-switching;

    References

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    1. Fong, Wai-Ming & Valente, Giorgio & Fung, Joseph K.W., 2010. "Covered interest arbitrage profits: The role of liquidity and credit risk," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1098-1107, May.
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    13. Naohiko Baba & Frank Packer & Teppei Nagano, 2008. "The spillover of money market turbulence to FX swap and cross-currency swap markets," BIS Quarterly Review, Bank for International Settlements, March.
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    Cited by:
    1. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis : a multivariate Markov-Switching analysis," Economics Papers from University Paris Dauphine 123456789/8773, Paris Dauphine University.

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