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Effectiveness of Central Bank Swap Lines in Alleviating the Mispricing of FX Swaps at the Start of the COVID-19 Pandemic

Author

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  • Kai Schellekens
  • Patty Duijm

Abstract

At the start of the COVID-19 pandemic the increased market volatility and risk aversion led to a deterioration of U.S. Dollar funding conditions in the Euro Area. The swap line interventions by the ECB and Federal Reserve on March 15, 2020 aimed to alleviate the mispricing of EUR/USD FX swaps. We find that these swap line interventions were effective since they alleviated part of the mispricing. The announcement effect of the interventions is however limited; the impact of the swap line interventions is larger and more significant closer to the implementation date. This study provides insight into the effectiveness of central bank interventions in the FX swap market during turbulent periods.

Suggested Citation

  • Kai Schellekens & Patty Duijm, 2022. "Effectiveness of Central Bank Swap Lines in Alleviating the Mispricing of FX Swaps at the Start of the COVID-19 Pandemic," Working Papers 752, DNB.
    • Handle: RePEc:dnb:dnbwpp:752
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Central Bank Policy: FX Swaps: Financial Markets: Covid-19;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G2 - Financial Economics - - Financial Institutions and Services
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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