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

  • Baba, Naohiko
  • Sakurai, Yuji
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    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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    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00422-X
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 6 (June)
    Pages: 1450-1463

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:6:p:1450-1463
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    1. Fletcher, Donna J & Taylor, Larry W, 1996. ""Swap" Covered Interest Parity in Long-Date Capital Markets," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 530-38, August.
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