Dynamic linkages among cross-currency swap markets under stress

Go Tamakoshi and Shigeyuki Hamori

Applied Economics Letters, 2013, vol. 20, issue 4, 404-409

Abstract: This article examines the impacts of the European sovereign debt crisis on the Dynamic Conditional Correlation (DCC) between three European currencies (EUR, CHF and GBP) and the US dollar for 1-year maturities. We found that the correlation between each pair of the swap prices significantly fluctuated over time and exhibited a higher co-movement during the crisis period, suggesting a higher degree of market integration. Importantly, applying a linear regression framework with a crisis dummy variable to the derived DCC, we find evidence of spillover effects of the sovereign debt turbulence to the cross-currency swap markets, as reflected in the increased co-movement between the EUR/USD and CHF/USD swap prices.

Date: 2013
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DOI: 10.1080/13504851.2012.709591

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