IDEAS home Printed from https://ideas.repec.org/a/wsi/ijfexx/v07y2020i02ns2424786320500188.html
   My bibliography  Save this article

Covered interest parity in cross-currency swap bases and demand for US treasuries

Author

Listed:
  • Cho-Hoi Hui

    (Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong, China)

  • Chi-Fai Lo

    (#x2020;Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, China)

  • Chin-To Fung

    (#x2020;Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, China)

Abstract

This paper studies the dynamic relationship between demand for the US Treasury yields and cross-currency swap (CCS) bases since the 2008 global financial crisis. Using a three-factor non-Gaussian-term structure model for the US Treasuries, an estimated short-rate premium in the yield curve tends to move in tandem with and lead the euro and Japanese yen CCS bases against the US dollar. The dynamics between the premium and CCS bases are found to be co-integrated, suggesting a long-run equilibrium between them. Empirically, the premium is found to be positively related to demand for Treasuries. This is consistent with recent studies in which factors including the strength of the US dollar, the demand for dollar funding and banks’ balance-sheet structures play important roles in determining the CCS bases. These factors increase demand for US Treasuries (high-quality US dollar assets) by investors searching for safe dollar assets and banks with higher leverages due to increased demand for dollar funding. The findings in this paper contribute to explaining the widespread failure of covered interest parity in foreign exchange swap markets.

Suggested Citation

  • Cho-Hoi Hui & Chi-Fai Lo & Chin-To Fung, 2020. "Covered interest parity in cross-currency swap bases and demand for US treasuries," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-28, June.
    • Handle: RePEc:wsi:ijfexx:v:07:y:2020:i:02:n:s2424786320500188
    DOI: 10.1142/S2424786320500188
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2424786320500188
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S2424786320500188?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijfexx:v:07:y:2020:i:02:n:s2424786320500188. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/worldscinet/ijfe .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.