Price Discovery from Cross-Currency and FX Swaps: A Structural Analysis
Preprint
- 1 November 2008
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
This paper investigates the relative role of price discovery between two long-term swap contracts that exchange U.S. dollars for Japanese yen - the cross-currency basis swap and the foreign exchange (FX) swap - using structural state space models. Our main findings are that: (i) the currency swap market plays a much more dominant role in price discovery than the FX swap market; and (ii) FX swap prices tend to under react to changes in the efficient price, while cross-currency swap prices react almost entirely to them.Keywords
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