When and How US Dollar Shortages Evolved into the Full Crisis? Evidence from the Cross-Currency Swap Market
affiliation not provided to SSRN
University of California, Los Angeles (UCLA) - Anderson School of Management
August 17, 2009
22nd Australasian Finance and Banking Conference 2009
This paper investigates when and how the US dollar shortage problem evolved into the full crisis during the financial turmoil that started in the summer of 2007, using cross-currency swap prices between three European currencies (EUR, GBP, and CHF) and USD. We employ the dynamic global (latent) factor model with regime-switching beta coefficients proposed by Kim (1994). The main findings are as follows. The global factor exists and there are 2 (high and low) distinctive regimes for beta coefficients of each observable price with respect to the global factor. The crisis indicators such as US and European financial credit spreads and TED spread have significant predictive power for regime-switching from and to the high-beta crisis regime. The 1-year market first entered the crisis regime soon after the onset of the subprime problem in August 2007, and has stayed in the crisis regime since early March, 2008. The 5-year market shows more gradual and delayed movements of both the global factor and the crisis regime probability, entering the crisis regime just after the collapse of Bear Sterns in mid-March, 2008.
Number of Pages in PDF File: 40
Keywords: Global financial crisis, US dollar shortage, Currency swap, Dynamic global factor model, Regime switching
JEL Classification: F31, F34, F36, G01, G15working papers series
Date posted: August 27, 2009 ; Last revised: December 7, 2009
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