Price discovery from cross-currency and FX swaps: a structural analysis

Naohiko Baba and Yasuaki Amatatsu

No 264, BIS Working Papers from Bank for International Settlements

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 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2008-11
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:264

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