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Information Flow between Sovereign CDS and Dollar-Yen Currency Option Markets in the Sovereign Debt Crisis of 2009-2011

Author

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  • Cho-Hoi Hui

    (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research)

  • Tom Fong

    (Hong Kong Monetary Authority)

Abstract

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.

Suggested Citation

  • Cho-Hoi Hui & Tom Fong, 2011. "Information Flow between Sovereign CDS and Dollar-Yen Currency Option Markets in the Sovereign Debt Crisis of 2009-2011," Working Papers 402011, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:402011
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    References listed on IDEAS

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    Cited by:

    1. Bekkour, Lamia & Jin, Xisong & Lehnert, Thorsten & Rasmouki, Fanou & Wolff, Christian, 2015. "Euro at risk: The impact of member countries' credit risk on the stability of the common currency," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 67-83.
    2. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    4. J. Alsubaiei, Bader & Calice, Giovanni & Vivian, Andrew, 2021. "Sovereign CDS and mutual funds: Global evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Sovereign Risk; Currency Options; Credit Default Swaps; Fiscal Situation;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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