Information Flow between Sovereign CDS and Dollar-Yen Currency Option Markets in the Sovereign Debt Crisis of 2009-2011
While the US dollar and Japanese yen are considered as safe-haven currencies, both their sovereign credit default swap (CDS) spreads and exchange rate have varied in a wide range since late 2007. This raises the question of interconnectivity between the anticipated sovereign credit risk and the market expectation of the dollar-yen exchange rate. This paper shows evidence of information flow from the sovereign CDS market to the dollar-yen currency option market during the sovereign debt crisis from September 2009 to August 2011 when concerns about sovereign credit risks in the developed economies were triggered. The impact of the US sovereign credit risk on the risk reversal is a separable risk factor in driving the market expectation of the dollar-yen exchange rate after controlling other macro-financial variables. While the Japanese sovereign CDS spread was higher than its US counterpart, its impact on the risk reversal was not significant.
|Date of creation:||Dec 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (852)2878 1978
Fax: (852)2878 7006
Web page: http://www.hkimr.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeffrey A. Frankel & Andrew K. Rose, 1996.
"Currency crashes in emerging markets: an empirical treatment,"
International Finance Discussion Papers
534, Board of Governors of the Federal Reserve System (U.S.).
- Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
- Cao, Charles & Yu, Fan & Zhong, Zhaodong, 2010. "The information content of option-implied volatility for credit default swap valuation," Journal of Financial Markets, Elsevier, vol. 13(3), pages 321-343, August.
- Martijn Cremers & Joost Driessen & Pascal Maenhout & David Weinbaum, 2004.
"Individual Stock-Option Prices and Credit Spreads,"
Yale School of Management Working Papers
amz2391, Yale School of Management, revised 01 Jan 2005.
- Benjamin Yibin Zhang & Hao Zhou & Haibin Zhu, 2005.
"Explaining credit default swap spreads with the equity volatility and jump risks of individual firms,"
Finance and Economics Discussion Series
2005-63, Board of Governors of the Federal Reserve System (U.S.).
- Benjamin Yibin Zhang & Hao Zhou & Haibin Zhu, 2009. "Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firms," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5099-5131, December.
- Angelo Ranaldo & Paul Söderlind, 2010.
"Safe Haven Currencies,"
Review of Finance,
European Finance Association, vol. 14(3), pages 385-407.
- Angelo Ranaldo & Paul Söderlind, 2007. "Safe Haven Currencies," Working Papers 2007-17, Swiss National Bank.
- Angelo Ranaldo & Paul Söderlind, 2007. "Safe Haven Currencies," University of St. Gallen Department of Economics working paper series 2007 2007-22, Department of Economics, University of St. Gallen.
- Ranaldo, Angelo & Söderlind, Paul, 2009. "Safe Haven Currencies," CEPR Discussion Papers 7249, C.E.P.R. Discussion Papers.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
- Farhi, Emmanuel & Fraiberger, Samuel P. & Gabaix, Xavier & Rancière, Romain & Verdelhan, Adrien, 2009.
"Crash Risk in Currency Markets,"
CEPR Discussion Papers
7322, C.E.P.R. Discussion Papers.
- Emmanuel Farhi & Samuel Paul Fraiberger & Xavier Gabaix & Romain Ranciere & Adrien Verdelhan, 2009. "Crash Risk in Currency Markets," NBER Working Papers 15062, National Bureau of Economic Research, Inc.
- Xavier Gabaix & Samuel Fraiberg & Romain Ranciere & Adrien Verdehlha & Emmanuel Farhi, 2010. "Crash Risk in Currency Market," 2010 Meeting Papers 640, Society for Economic Dynamics.
- Carr, Peter & Wu, Liuren, 2007. "Theory and evidence on the dynamic interactions between sovereign credit default swaps and currency options," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2383-2403, August.
- David A. Pierce & Larry D. Haugh, 1977. "Causality in temporal systems: characterizations and a survey," Special Studies Papers 87, Board of Governors of the Federal Reserve System (U.S.).
- Jun Pan & Kenneth J. Singleton, 2008. "Default and Recovery Implicit in the Term Structure of Sovereign "CDS" Spreads," Journal of Finance, American Finance Association, vol. 63(5), pages 2345-2384, October.
- Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003. "Predicting emerging market currency crashes," Journal of Empirical Finance, Elsevier, vol. 10(4), pages 427-454, September.
- Acharya, Viral V & Johnson, Tim, 2005.
"Insider Trading in Credit Derivatives,"
CEPR Discussion Papers
5180, C.E.P.R. Discussion Papers.
- Pierce, David A. & Haugh, Larry D., 1977. "Causality in temporal systems : Characterization and a survey," Journal of Econometrics, Elsevier, vol. 5(3), pages 265-293, May.
When requesting a correction, please mention this item's handle: RePEc:hkm:wpaper:402011. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (HKIMR)
If references are entirely missing, you can add them using this form.