Cross-currency basis swap spreads and corporate dollar funding

Lior David-Pur, Koresh Galil, Mosi Rosenboim and Offer Moshe Shapir

Journal of International Financial Markets, Institutions and Money, 2023, vol. 85, issue C

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. Furthermore, 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 (search for similar items in EconPapers)
JEL-codes: E43 F31 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:85:y:2023:i:c:s1042443123000483

DOI: 10.1016/j.intfin.2023.101780

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