Price Discovery from Cross-Currency and FX Swaps: A Structural Analysis

23 Pages Posted: 27 Jan 2009

See all articles by Yasuaki Amatatsu

Yasuaki Amatatsu

affiliation not provided to SSRN

Naohiko Baba

Bank of Japan - Financial Markets Department

Date Written: November 2008

Abstract

This paper investigates the relative role of price discovery between two long-term swap contracts that exchange U.S. dollars for Japanese yen - the cross-currency basis swap and the foreign exchange (FX) swap - using structural state space models. Our main findings are that: (i) the currency swap market plays a much more dominant role in price discovery than the FX swap market; and (ii) FX swap prices tend to under react to changes in the efficient price, while cross-currency swap prices react almost entirely to them.

Keywords: Currency Swap, FX Swap, Price Discovery, State Space Model, Efficient Price

JEL Classification: G12, G14, G15

Suggested Citation

Amatatsu, Yasuaki and Baba, Naohiko, Price Discovery from Cross-Currency and FX Swaps: A Structural Analysis (November 2008). BIS Working Paper No. 264, Available at SSRN: https://ssrn.com/abstract=1333629 or http://dx.doi.org/10.2139/ssrn.1333629

Yasuaki Amatatsu

affiliation not provided to SSRN ( email )

Naohiko Baba (Contact Author)

Bank of Japan - Financial Markets Department ( email )

2-1-1, Hongoku-cho
Nihonbashi
Chuo-ku, Tokyo, 103
Japan

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