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|
|Contact details of provider:|| Postal: 55th Floor , Two International Finance Centre , 8 Finance Street , Central, Hong Kong|
Phone: (852)2878 1978
Fax: (852)2878 7006
Web page: http://www.hkimr.org
More information through EDIRC
References listed on IDEAS
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.:
- Ranaldo, Angelo & Söderlind, Paul, 2009.
"Safe Haven Currencies,"
CEPR Discussion Papers
7249, C.E.P.R. Discussion Papers.
- 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.
- Angelo Ranaldo & Paul Söderlind, 2007. "Safe Haven Currencies," Working Papers 2007-17, Swiss National Bank.
- 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.
- Cremers, Martijn & Driessen, Joost & Maenhout, Pascal & Weinbaum, David, 2008.
"Individual stock-option prices and credit spreads,"
Journal of Banking & Finance,
Elsevier, vol. 32(12), pages 2706-2715, December.
- Acharya, Viral V. & Johnson, Timothy C., 2007.
"Insider trading in credit derivatives,"
Journal of Financial Economics,
Elsevier, vol. 84(1), pages 110-141, April.
- 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.).
- 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.
- 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.
- Emmanuel Farhi & Samuel Fraiberger & Xavier Gabaix & Romain Ranciere & Adrien Verdelhan, 2015. "Crash Risk in Currency Markets," Working Paper 20948, Harvard University OpenScholar.
- 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.
- Xavier Gabaix & Samuel Fraiberg & Romain Ranciere & Adrien Verdehlha & Emmanuel Farhi, 2010. "Crash Risk in Currency Market," 2010 Meeting Papers 640, Society for Economic Dynamics.
- Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003.
"Predicting emerging market currency crashes,"
Journal of Empirical Finance,
Elsevier, vol. 10(4), pages 427-454, September.
- Graciela Laura Kaminsky, 1997.
"Leading Indicators of Currency Crises,"
IMF Working Papers
97/79, International Monetary Fund.
- Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
- Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
- 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.
- 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.
- Benjamin Y. 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.
- Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
- 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.
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.