The dollar squeeze of the financial crisis

Jean-Marc Bottazzi, Jaime Luque (), Mário R. Páscoa () and Suresh Sundaresan ()
Additional contact information
Jaime Luque: Universidad Carlos III de Madrid
Mário R. Páscoa: NOVA - Business School of Economics and Finance
Suresh Sundaresan: Columbia University
Authors registered in the RePEc Author Service: Mario Rui Pascoa

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: By Covered Interest rate Parity (CIP), the FX swap implied currency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro-Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the "convenience yield" associated with that currency. This is similar to specialness in repro markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis

Keywords: FX swaps; repo; Euro-Dollar currency basis; the 2008 dollar squeeze; possession (search for similar items in EconPapers)
JEL-codes: D52 D53 G12 G14 G15 G18 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-02
New Economics Papers: this item is included in nep-ifn and nep-mon
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http://mse.univ-paris1.fr/pub/mse/CES2012/12009.pdf (application/pdf)

Related works:
Working Paper: The Dollar Squeeze of the Financial Crisis (2012)
Working Paper: The dollar squeeze of the financial crisis (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:12009

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