Dollar Shortage, Central Bank Actions, and the Cross Currency Basis

47 Pages Posted: 28 Oct 2012 Last revised: 30 Oct 2012

See all articles by Jean-Marc Bottazzi

Jean-Marc Bottazzi

Paris School of Economics (PSE)

Jaime Luque

Wisconsin School of Business

Mario Pascoa

affiliation not provided to SSRN

Suresh M. Sundaresan

Columbia Business School - Finance and Economics

Date Written: October 27, 2012

Abstract

In our model, cross-currency basis, which captures the deviations from covered interest rate parity (CIP), reflects the relative value of the scarcer currency (US dollar) as collateral in funding constraints. Our empirical evidence shows that measures of dollar shortage derived from ECB tenders, and actions to move to fixed-rate tenders with full allotment and to expand the eligible collateral by the ECB have significant power in explaining the cross currency basis. We show that the relaxation of Euro funding constraints through 3-year Long Term Re-financing Operations (LTROs) does not contribute to the narrowing of the cross-currency basis, consistent with the theory developed in the paper.

Keywords: Euro-Dollar currency basis, the 2008 dollar squeeze, possession, canonical buy-sell arbitrage, central banks coordinated intervention, money markets, liquidity

JEL Classification: D52, D53, G12, G14, G15, G18

Suggested Citation

Bottazzi, Jean-Marc and Luque, Jaime and Pascoa, Mario and Sundaresan, Suresh M., Dollar Shortage, Central Bank Actions, and the Cross Currency Basis (October 27, 2012). Available at SSRN: https://ssrn.com/abstract=2167716 or http://dx.doi.org/10.2139/ssrn.2167716

Jean-Marc Bottazzi

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Jaime Luque (Contact Author)

Wisconsin School of Business ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Mario Pascoa

affiliation not provided to SSRN ( email )

Suresh M. Sundaresan

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

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