Price discovery from cross-currency and FX swaps: a structural analysis
AbstractThis paper investigates the relative role of price discovery between two long-term swap contracts that exchange U.S. dollars for Japanese yen - the cross-currency basis swap and the foreign exchange (FX) swap - using structural state space models. Our main findings are that: (i) the currency swap market plays a much more dominant role in price discovery than the FX swap market; and (ii) FX swap prices tend to under react to changes in the efficient price, while cross-currency swap prices react almost entirely to them.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 264.
Length: 23 pages
Date of creation: Nov 2008
Date of revision:
Currency Swap; FX Swap; Price Discovery; State Space Model; Efficient Price;
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