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When and how US dollar shortages evolved into the full crisis? Evidence from the cross-currency swap market

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  • Baba, Naohiko
  • Sakurai, Yuji

Abstract

This paper investigates when and how the US dollar shortages evolved into the full crisis in the cross-currency swap market between major European currencies and the US dollar during the turmoil of 2007-2009, using the dynamic factor model with regime-switching [beta] coefficients of each swap price with respect to the latent common factor. The 1-year market entered the high-[beta] crisis regime soon after the onset of the subprime problem in August 2007. The 10-year market entered that regime following the collapse of Bear Sterns in mid-March 2008. Financial credit spreads have significant predictive power for switches between high and low-[beta] regimes.

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  • Baba, Naohiko & Sakurai, Yuji, 2011. "When and how US dollar shortages evolved into the full crisis? Evidence from the cross-currency swap market," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1450-1463, June.
    • Handle: RePEc:eee:jbfina:v:35:y:2011:i:6:p:1450-1463
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    2. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis: A multivariate Markov-switching analysis," Economic Modelling, Elsevier, vol. 29(3), pages 943-973.
    3. G. Tamakoshi & S. Hamori, 2013. "Dynamic linkages among cross-currency swap markets under stress," Applied Economics Letters, Taylor & Francis Journals, vol. 20(4), pages 404-409, March.
    4. Jie Yang & Liyan Han, 2013. "Optimal size of currency swap between central banks: evidence from China," Applied Economics Letters, Taylor & Francis Journals, vol. 20(3), pages 203-207, February.
    5. David-Pur, Lior & Galil, Koresh & Rosenboim, Mosi & Shapir, Offer Moshe, 2023. "Cross-currency basis swap spreads and corporate dollar funding," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).

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