The Link between FX Swaps and Currency Strength during the Credit Crisis of 2007-2008

Covered interest arbitrage profits: The role of liquidity and credit risk

“…As in Genberg et al (2009) the measure is computed as the difference between the HKD-denominated LIBOR-OIS spread and the equivalent LIBOR-OIS spread denominated in USD. 11 A positive difference denotes a situation where Hong Kong financial institutions are perceived to be riskier than US financial institutions.…”

“…Other related papers are Baba and Packer (2009), Genberg et al (2009), Mancini Griffoli and Ranaldo (2009) and McAndrews and Sarkar (2009 who investigate the spillover effects of the money market turbulence in 2007-2008 on short-term CIP deviations between the US dollar and the major currencies and the effects of the Federal Reserve's responses to the crisis on credit and liquidity risk. Our work differs from theirs in that we do not focus on the behavior of the FX and money markets during turbulent periods, such as the recent 2007-2008 financial crisis, but we try to understand the role of market liquidity and credit risk on arbitrage activities under normal market conditions.…”

Interest Rate Parity

“…After the Lehman collapse, Coffey et al (2009) find that counterparty risk and credit risk proxies become significant variables explaining CIP deviations. Genberg et al (2009) analyze CIP deviations for the USD-EUR and five other currency pairs. Their results suggest that CIP deviations were smaller for Hong Kong, Japan, and Singapore (vs. the USD) consistent with lower implied bank default risks in those countries.…”

Regional Liquidity Risk and Covered Interest Parity During the Global Financial Crisis: Evidence from Tokyo, London, and New York*

“…Taylor and Williams (2009) show how TAF affected risk premiums in the US interbank market. Goldberg, Grittini, Miu, and Rose (2009) show the contribution of foreign exchange swap lines among central banks to reducing dollar funding pressures and limiting stresses in money markets (see also Genberg, Hui, Wong and Chung, 2009;Aizenman and Pasricha, 2009 for their recent contribution to the same topic). However, unlike these studies, we find that central bank liquidity provisions had varieties of asymmetric effects across the markets.…”