Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08

Naohiko Baba and Frank Packer ()

Journal of Banking & Finance, 2009, vol. 33, issue 11, 1953-1962

Abstract: This paper investigates the spillover effects of money market turbulence in 2007-08 on the short-term covered interest parity (CIP) condition between the US dollar and the euro through the foreign exchange (FX) swap market. Sharp and persistent deviations from the CIP condition observed during the turmoil are found to be significantly associated with differences in the counterparty risk between European and US financial institutions. Furthermore, evidence is found that US dollar term funding auctions by the ECB, supported by US dollar swap lines with the Federal Reserve, alleviated the level of dislocations, as well as the instability, of the FX swap market.

Keywords: FX; swap; Covered; interest; parity; Financial; market; turmoil; Counterparty; risk; US; dollar; swap; lines; US; dollar; term; auction; facility (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (131)

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Working Paper: Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08 (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:11:p:1953-1962

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