The dollar squeeze of the financial crisis
By Covered Interest rate Parity (CIP), the FX swap implied currency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro-Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the "convenience yield" associated with that currency. This is similar to specialness in repro markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.
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- Bottazzi, Jean-Marc & Luque, Jaime & Páscoa, Mário R., 2012.
"Securities market theory: Possession, repo and rehypothecation,"
Journal of Economic Theory,
Elsevier, vol. 147(2), pages 477-500.
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- Vayanos, Dimitri & Weill, Pierre-Olivier, 2006.
"A Search-Based Theory of the On-the-Run Phenomenon,"
CEPR Discussion Papers
5965, C.E.P.R. Discussion Papers.
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- Pierre-Olivier Weill & Dimitri Vayanos, 2007. "A Search-Based Theory of the On-the-Run Phenomenon," FMG Discussion Papers dp577, Financial Markets Group.
- Dimitri Vayanos & Pierre-Olivier Weill, 2005. "A search-based theory of the on-the-run phenomenon," LSE Research Online Documents on Economics 459, London School of Economics and Political Science, LSE Library.
- Dimitri Vayanos & Pierre-Olivier Weill, 2007. "A search-based theory of the on-the-run phenomenon," LSE Research Online Documents on Economics 24474, London School of Economics and Political Science, LSE Library.
- Pierre-Olivier Weill & Dimitri Vayanos, 2005. "A Search-Based Theory of the On-the-Run Phenomenon," 2005 Meeting Papers 701, Society for Economic Dynamics.
- Niall Coffey & Warren B. Hrung & Asani Sarkar, 2009. "Capital constraints, counterparty risk, and deviations from covered interest rate parity," Staff Reports 393, Federal Reserve Bank of New York.
- Leonardo Bartolini & Spence Hilton & Suresh Sundaresan & Christopher Tonetti, 2011. "Collateral Values by Asset Class: Evidence from Primary Securities Dealers," Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 248-278.
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