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The spillover of money market turbulence to FX swap and cross-currency swap markets

  • Naohiko Baba
  • Frank Packer
  • Teppei Nagano
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    We analyse the spillover of the turmoil in money markets in the second half of 2007 to FX swap and long-term cross-currency basis swap markets. We find that the use of swap markets to overcome US dollar funding shortages by non-US financial institutions resulted in marked deviations from covered interest parity conditions and the impairment of liquidity in these markets.

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    Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

    Volume (Year): (2008)
    Issue (Month): (March)
    Pages:

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    Handle: RePEc:bis:bisqtr:0803h
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    1. Fletcher, Donna J. & Taylor, Larry W., 1994. "A non-parametric analysis of covered interest parity in long-date capital markets," Journal of International Money and Finance, Elsevier, vol. 13(4), pages 459-475, August.
    2. Taylor, Mark P, 1989. "Covered Interest Arbitrage and Market Turbulence," Economic Journal, Royal Economic Society, vol. 99(396), pages 376-91, June.
    3. Duffie, Darrell & Huang, Ming, 1996. " Swap Rates and Credit Quality," Journal of Finance, American Finance Association, vol. 51(3), pages 921-49, July.
    4. Popper, Helen, 1993. "Long-term covered interest parity: evidence from currency swaps," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 439-448, August.
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