Interrelations among Cross-Currency Basis Swap Spreads: Pre- and Post-Crisis Analysis

Abstract

Several studies have investigated the magnitude, drivers, and even reasons for the existence of cross-currency basis swap spreads. However, studies examining the interrelations among these spreads have surprisingly been lacking. In this article, the author examines the long-run relationships and short-run dynamic linkages among nine major cross-currency swap spreads, emphasizing how crisis periods have impacted the long-run relationships and short-run dynamics. Results show that the long-run relationships were slightly weakened after crisis, while the short-run linkages were generally strengthened. The influence of euro and Swiss cross-currency swaps on other European cross-currency swaps generally increased after the crisis period, and the Swiss cross-currency swap became much more influential on all European cross-currency swaps. The findings are robust to alternative reordering of variables in the author’s nine-variable VaR system, computation of generalized impulse response functions, and consideration of rolling variance decompositions.

TOPICS: Currency, interest-rate and currency swaps, developed markets, VAR and use of alternative risk measures of trading risk