Cross-Currency Basis Swap Spreads and Corporate Dollar Funding

37 Pages Posted: 12 Dec 2022

See all articles by Lior David-Pur

Lior David-Pur

Ben-Gurion University of the Negev

Koresh Galil

Ben-Gurion University of the Negev - Department of Economics

mosi rosenboim

Ben-Gurion University of the Negev

Offer Shapir

New York University (NYU) - New York University (NYU), Shanghai

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Abstract

This study examines the failure of covered interest parity (CIP) in long-term cross-currency basis swap (CCBS) markets. We conjecture that frictions in corporate bond markets urge firms to raise funds in one market and enter a CCBS contract to exchange the debt in a different currency. Therefore, frictions in the corporate bond market explain the failure of CIP in the long-term CCBS market. We illustrate this idea using a simple theoretical model and then explore the determinants of CCBS spreads and demonstrate the links between corporate funding needs and the long-term CCBS market. We show that frictions (illiquidity in the banking sector) and credit risk are essential drivers of CCBS spreads during economic stress.

Keywords: covered interest rate parity, cross-currency basis swaps, cross-currency swaps, bond markets

Suggested Citation

David-Pur, Lior and Galil, Koresh and rosenboim, mosi and Shapir, Offer, Cross-Currency Basis Swap Spreads and Corporate Dollar Funding. Available at SSRN: https://ssrn.com/abstract=4299839 or http://dx.doi.org/10.2139/ssrn.4299839

Lior David-Pur

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

Koresh Galil

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
+972-8-6472310 (Phone)

Mosi Rosenboim

Ben-Gurion University of the Negev

Offer Shapir (Contact Author)

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Shanghai, Shanghai 200122
China

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