The Dollar Squeeze of the Financial Crisis
AbstractBy Covered Interest rate Parity (CIP), the FX swap implied currency 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 repro 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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Date of creation: Feb 2012
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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.
- Jean-Marc Bottazzi & Jaime Luque & Mario R. Pascoa & Suresh Sundaresan, 2011. "The dollar squeeze of the financial crisis," Economics Working Papers we1139, Universidad Carlos III, Departamento de Economía.
- 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-2012-03-08 (All new papers)
- NEP-IFN-2012-03-08 (International Finance)
- NEP-MON-2012-03-08 (Monetary Economics)
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