When and How US Dollar Shortages Evolved into the Full Crisis? Evidence from the Cross-Currency Swap Market

40 Pages Posted: 27 Aug 2009 Last revised: 7 Dec 2009

See all articles by Naohiko Baba

Naohiko Baba

affiliation not provided to SSRN

Yuji Sakurai

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: August 17, 2009

Abstract

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.

Keywords: Global financial crisis, US dollar shortage, Currency swap, Dynamic global factor model, Regime switching

JEL Classification: F31, F34, F36, G01, G15

Suggested Citation

Baba, Naohiko and Sakurai, Yuji, When and How US Dollar Shortages Evolved into the Full Crisis? Evidence from the Cross-Currency Swap Market (August 17, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1456381 or http://dx.doi.org/10.2139/ssrn.1456381

Naohiko Baba (Contact Author)

affiliation not provided to SSRN

Yuji Sakurai

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
146
Abstract Views
1,170
rank
198,526
PlumX Metrics