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Dislocations In The Won‐Dollar Swap Markets During The Crisis Of 2007–2009

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  • Naohiko Baba
  • Ilhyock Shim

Abstract

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.

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  • Naohiko Baba & Ilhyock Shim, 2014. "Dislocations In The Won‐Dollar Swap Markets During The Crisis Of 2007–2009," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 19(4), pages 279-302, October.
    • Handle: RePEc:wly:ijfiec:v:19:y:2014:i:4:p:279-302
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    Cited by:

    1. Ree, Jack Joo K. & Yoon, Kyoungsoo & Park, Hail, 2015. "FX funding risks and exchange rate volatility," Emerging Markets Review, Elsevier, vol. 25(C), pages 163-175.
    2. Fatum, Rasmus & Yetman, James, 2020. "Accumulation of foreign currency reserves and risk-taking," Journal of International Money and Finance, Elsevier, vol. 102(C).
    3. Bank for International Settlements, 2015. "Currency carry trades in Latin America," BIS Papers, Bank for International Settlements, number 81.
    4. Lidija Dedi & Burhan F. Yavas, 2016. "Return and volatility spillovers in equity markets: An investigation using various GARCH methodologies," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1266788-126, December.
    5. Choi, Hanbok & Eom, Young Ho & Jang, Woon Wook & Kim, Don H., 2017. "Covered interest parity deviation and counterparty default risk: U.S. Dollar/Korean Won FX swap market," Pacific-Basin Finance Journal, Elsevier, vol. 44(C), pages 47-63.

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