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Interconnected Deviations from Covered Interest Parity

Author

Listed:
  • Daniel Felix Ahelegbey

    (University of Pavia)

  • Oyakhilome Wallace Ibhagui

    (Baum Tenpers Research Institute)

Abstract

We investigate the dynamic interconnectedness among the major world cross-currency basis swap spreads during tranquil and turbulent times. We examine whether movements in the bases are merely anecdotal or provide evidence of contagion, the most central basis for spillover propagation, and implications for market participants. The result shows a high degree of interconnectedness among the bases in crisis periods with mark-to-market losses for existing exposures and large arbitrage opportunities for investors seeking new positions. We find evidence that spillovers in the bases propagate from the Euro, the Swiss franc, and the Danish krone to other bases.

Suggested Citation

  • Daniel Felix Ahelegbey & Oyakhilome Wallace Ibhagui, 2020. "Interconnected Deviations from Covered Interest Parity," DEM Working Papers Series 191, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0191
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    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0191.pdf
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    More about this item

    Keywords

    Covered Interest Parity; Cross-currency Basis; Currency Swaps; Dollar Funding; Financial Crisis; Interconnectedness; VAR Model.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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