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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Bibliographic InfoPaper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 12009.
Length: 36 pages
Date of creation: Feb 2012
Date of revision:
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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 & Mario R. Pascoa & Suresh Sundaresan, 2011. "The dollar squeeze of the financial crisis," Economics Working Papers we1139, Universidad Carlos III, Departamento de Economía.
- Jean-Marc Bottazzi & Jaime Luque & Mário R. Páscoa & Suresh Sundaresan, 2012. "The Dollar Squeeze of the Financial Crisis," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00673982, HAL.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- 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-2012-02-27 (All new papers)
- NEP-IFN-2012-02-27 (International Finance)
- NEP-MON-2012-02-27 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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