by Naohiko Baba, Frank Packer and Teppei Nagano
We analyse the spillover of the turmoil in money markets in the second half of 2007 to FX swap and long-term cross-currency basis swap markets. We find that the use of swap markets to overcome US dollar funding shortages by non-US financial institutions resulted in marked deviations from covered interest parity conditions and the impairment of liquidity in these markets.
JEL classification: G12, G14, G15.
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