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Dynamic Spillover of Money Market Turmoil from FX Swap to Cross-Currency Swap Markets: Evidence from the 2007–2008 Turmoil

Naohiko Baba
The Journal of Fixed Income Spring 2009, 18 (4) 24-38; DOI: https://doi.org/10.3905/JFI.2009.18.4.024
Naohiko Baba
is a senior economist at the Bank for International Settlements in Basel, Switzerland.
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  • For correspondence: naohiko.baba@bis.org
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Abstract

This paper investigates the dynamic spillover of 2007–08 money market turmoil from short-term FX swap to the longer-term cross-currency swap markets. Under the turmoil, the short-term covered parity (CIP) deviation (FX swap deviation) and long-term CIP deviation (cross-currency swap price) are significantly in a one-on-one cointegrating relationship. The Granger test shows a significant causality from the short-term to long-term deviation. The bivariate GARCH model reveals a significant volatility spillover in the same direction and a substantial shift-up in conditional correlation. The principal component analysis shows that these deviations are driven largely by the factors that characterize the money market turmoil.

TOPICS: Interest-rate and currency swaps, financial crises and financial market history, statistical methods, volatility measures

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The Journal of Fixed Income
Vol. 18, Issue 4
Spring 2009
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Dynamic Spillover of Money Market Turmoil from FX Swap to Cross-Currency Swap Markets: Evidence from the 2007–2008 Turmoil
Naohiko Baba
The Journal of Fixed Income Mar 2009, 18 (4) 24-38; DOI: 10.3905/JFI.2009.18.4.024

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Dynamic Spillover of Money Market Turmoil from FX Swap to Cross-Currency Swap Markets: Evidence from the 2007–2008 Turmoil
Naohiko Baba
The Journal of Fixed Income Mar 2009, 18 (4) 24-38; DOI: 10.3905/JFI.2009.18.4.024
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  • Article
    • Abstract
    • FX SWAP AND CROSS-CURRENCY BASIS SWAP MARKETS
    • EMPIRICAL METHODOLOGIES TO MEASURE DYNAMIC SPILLOVER EFFECTS
    • ESTIMATION RESULTS FOR DYNAMIC SPILLOVER EFFECTS
    • DOES MONEY MARKET TURMOIL CO-MOVE SHORT-TERM AND LONG-TERM CIP DEVIATIONS?
    • CONCLUDING REMARKS
    • ENDNOTES
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