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Dislocations in FX Swap and Money Markets in Hong Kong and Policy Actions during the Financial Crisis of 2008

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  • Laurence Fung

    (Research Department, Hong Kong Monetary Authority)

  • Ip-wing Yu

    (Research Department, Hong Kong Monetary Authority)

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    Abstract

    When US dollar interbank markets malfunctioned during the global financial crisis of 2008, many non-US financial institutions relied heavily on the foreign-exchange (FX) swap markets for US-dollar funds. This one-sided market induced a risk premium of the FX swap-implied US-dollar rate across a range of funding currencies, i.e. a deviation from the covered interest parity (CIP) condition. The turbulence in the global interbank markets therefore spilled over to the FX swap markets, including that in Hong Kong. This paper analyses the effectiveness of the policy actions taken by the Hong Kong Monetary Authority and the Government in responding to the dislocations and stress in the local interbank and FX swap markets. Our results show that the policy actions effectively ameliorated the FX swap market dislocations after the failure of Lehman Brothers, i.e. reducing the CIP deviations.

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    File URL: http://www.hkma.gov.hk/media/eng/publication-and-research/research/working-papers/HKMAWP09_17_full.pdf
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    Bibliographic Info

    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0917.

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    Length: 13 pages
    Date of creation: Oct 2009
    Date of revision:
    Handle: RePEc:hkg:wpaper:0917

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    Related research

    Keywords: FX swaps; Covered interest parity; interbank stress; Exponential GARCH;

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    1. Cho-Hoi Hui & Hans Genberg & Tsz-Kin Chung, 2009. "Funding Liquidity Risk and Deviations from Interest-Rate Parity During the Financial Crisis of 2007-2009," Working Papers, Hong Kong Monetary Authority 0913, Hong Kong Monetary Authority.
    2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
    3. James McAndrews & Asani Sarkar & Zhenyu Wang, 2008. "The effect of the Term Auction Facility on the London Inter-Bank Offered Rate," Staff Reports, Federal Reserve Bank of New York 335, Federal Reserve Bank of New York.
    4. Taylor, Mark P, 1989. "Covered Interest Arbitrage and Market Turbulence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(396), pages 376-91, June.
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