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