The dollar squeeze of the financial crisis
AbstractBy Covered Interest rate Parity (CIP), the FX swap implied currrency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro- Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the “convenience yield” associated with that currency. This is similar to specialness in repo markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1139.
Date of creation: Dec 2011
Date of revision:
FX swaps; Repo; Euro-Dollar currency basis; The 2008 dollar squeeze; Possession;
Other versions of this item:
- Jean-Marc Bottazzi & Jaime Luque & Mário R. Páscoa & Suresh Sundaresan, 2012. "The dollar squeeze of the financial crisis," Documents de travail du Centre d'Economie de la Sorbonne 12009, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-25 (All new papers)
- NEP-CWA-2012-01-25 (Central & Western Asia)
- NEP-IFN-2012-01-25 (International Finance)
- NEP-MON-2012-01-25 (Monetary Economics)
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