Cross-currency basis swap spreads and corporate dollar funding

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

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

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.

Original languageEnglish
Article number101780
JournalJournal of International Financial Markets, Institutions and Money
Volume85
DOIs
StatePublished - 1 Jun 2023

Keywords

  • Bond markets
  • Covered interest rate parity
  • Cross-currency basis swaps
  • Cross-currency swaps

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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