ANALYSING CROSS-CURRENCY BASIS SPREADS

• Authors: Baran Jaroslav , Witzany Jiří
• Languages of publication: EN

Abstracts

EN

This paper investigates the drivers of cross-currency basis spreads, which were historically close to zero but have widened significantly since the start of the financial crisis. Credit and liquidity risk, as well as supply and demand have often been cited as general factors driving cross-currency basis spreads, however, these spreads may widen beyond what is normally explained by such variables. We suggest market proxies for EUR/USD basis swap spread drivers and build a multiple regression and a co-integration model to explain their significance during three different historical periods of basis widening. The most important drivers of the cross-currency basis spreads appear to be short- and long-term EU financial sector credit risk indicators, and to a slightly lesser extent, short- and long-term US financial sector credit risk indicators. Another important driver is the market volatility for the short-end basis spread, and the EUR/USD exchange rate for the long-term basis spread, and to a lesser extent, the Fed/ECB balance sheet ratio.

Keywords

EN

CROSS-CURRENCY; SWAP; INDEXED SWAP; CO-INTEGRATION; EU

• Publisher: Institute of Slovak and World Economics and Institute for Forecasting, Slovak Academy of Sciences
• Journal: Ekonomický časopis (Journal of Economics)
• Year: 2018
• Volume: 66
• Issue: 10
• Pages: 1002 – 1030

Contributors

author

Baran Jaroslav

• European Stability Mechanism, 6a Circuit de la Foire Internationale, L-1347 Luxembourg City, Luxembourg

author

Witzany Jiří