Y2k Fears and Safe Haven Trading of the U.S. Dollar

39 Pages Posted: 15 Dec 2005

See all articles by Aditya Kaul

Aditya Kaul

University of Alberta - Department of Finance and Statistical Analysis

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business

Abstract

We assess the impact of safe haven flows on market liquidity by examining the bid-ask spread in the Euro-U.S. dollar spot and forward markets around Y2K. In the months preceding December 1999, it was widely believed that the U.S. was the best prepared for Y2K and funds would flow into U.S. assets. Intraday spot and forward spreads widen in December 1999 and stay wide through January 2000, well after the resolution of Y2K-related uncertainty. Daily spreads widen for one, three and six-month forwards maturing in January 2000. The explanation most consistent with these results is that Y2K-driven safe haven flows affect dealers' inventory positions and thereby market liquidity.

Keywords: foreign exchange, safe haven, bid-ask spread

JEL Classification: F31, G15

Suggested Citation

Kaul, Aditya and Sapp, Stephen G., Y2k Fears and Safe Haven Trading of the U.S. Dollar. Journal of International Money and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=869544

Aditya Kaul

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
403-492-5027 (Phone)
403-492-3325 (Fax)

Stephen G. Sapp (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada
519-661-3006 (Phone)
519-661-3959 (Fax)

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