When and how US dollar shortages evolved into the full crisis? Evidence from the cross-currency swap market

• Published in: Journal of banking & finance Vol. 35; no. 6; pp. 1450 - 1463
• Main Authors: Baba, Naohiko, Sakurai, Yuji
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.06.2011; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Banking & Finance
• Subjects: American dollar; Coefficients; Currency; Currency swap; Currency swaps; Dollar; Dynamic factor model; Economic crisis; Exchange market; Financial crisis; Foreign exchange; Foreign exchange markets; Global financial crisis; Global financial crisis US dollar shortage Currency swap Dynamic factor model Regime-switching; Market analysis; Market prices; Price level; Regime-switching; Shortage; Spread; Studies; US dollar shortage; United States > US; US dollar shortage; F31; F34; Currency swap; Regime-switching; F36; Dynamic factor model; G01; G15; Global financial crisis
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2010.10.030

This paper investigates when and how the US dollar shortages evolved into the full crisis in the cross-currency swap market between major European currencies and the US dollar during the turmoil of 2007–2009, using the dynamic factor model with regime-switching β coefficients of each swap price with respect to the latent common factor. The 1-year market entered the high- β crisis regime soon after the onset of the subprime problem in August 2007. The 10-year market entered that regime following the collapse of Bear Sterns in mid-March 2008. Financial credit spreads have significant predictive power for switches between high and low- β regimes.