We investigate how much of the CIP (covered interest parity) deviation observed in FX swap markets during the financial crisis can be explained by credit risk. To this end, we develop a structural model of defaultable FX swaps, applying the approach of Coval et al (2009a,b) to the FX setting. Calibrating the model to the CDS spreads of Korean banks and US banks, we find that as much as 65% of the CIP deviation in the US Dollar / Korean Won FX swaps can be explained by counterparty risk; most of this effect is due to the counterparty risk of Korean banks (as opposed to US banks). The influence of counterparty default risk is pronounced especially for the period after the default of Lehman Brothers.
Keywords: Arrow-Debreu State Price, Counterparty Default Risk, Covered Interest Parity, Foreign Exchange Risk, FX Swap.
학회 소식
공지사항
[2014년 제 1차] Covered Interest Parity Deviation and Counterparty
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게시일 :
2014-02-24