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DISLOCATIONS IN THE WON‐DOLLAR SWAP MARKETS DURING THE CRISIS OF 2007–2009
Author(s) -
Baba Naohiko,
Shim Ilhyock
Publication year - 2014
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1492
Subject(s) - foreign exchange swap , liberian dollar , swap (finance) , volatility (finance) , economics , monetary economics , currency , credit default swap , interest rate swap , financial crisis , interest rate parity , us dollar , financial system , financial economics , credit risk , finance , keynesian economics
ABSTRACT We analyse dislocations in the foreign exchange swap and cross‐currency swap markets between Korean won and US dollar from 2007 to 2009. A regime‐switching analysis of deviations from covered interest parity (CIP) identifies a crisis period starting in June 2007. Using an EGARCH model, we find that volatility index and the credit default swap spreads of Korean and US banks are the main factors explaining CIP deviations. We show that the Bank of Korea's US dollar loans of the proceeds of swaps with the US Federal Reserve were effective in reducing CIP deviations, whereas the provision of funds using its foreign reserves was not. Copyright © 2014 John Wiley & Sons, Ltd.