Effectiveness of Central Bank Swap Lines in Alleviating the Mispricing of FX Swaps at the Start of the COVID-19 Pandemic
Gepubliceerd: 27 oktober 2022
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.
Keywords: Central Bank Policy: FX Swaps: Financial Markets: Covid-19
JEL codes E58: G2: G15: H12
Working paper no. 752
Research highlights:
- In reaction to the COVID-19 pandemic, the price of FX swaps started to deviate substantially from the no-arbitrage price based on the Covered Interest rate Parity condition (CIP).
- Since the mispricing of FX swaps comes with implications for both the financial system and policymakers, central banks intervened in the market by adjusting the swap lines.
- We study the impact of the swap line interventions by the Federal Reserve and the ECB on the EUR/USD FX swap and find that these were effective in the sense that they lowered the CIP deviation of the EUR/USD FX swap.
- These results are relevant for policymakers since they provide insight into the FX swap market when central banks intervene with swap lines.
- The main take-away is the ability of central bank swap line interventions to affect the pricing of FX swaps in a situation where both demand and supply are disrupted.
752 - Effectiveness of Central Bank Swap Lines in Alleviating the Mispricing of FX Swaps at the Start of the COVID-19 Pandemic
Ontdek gerelateerde artikelen
DNB maakt gebruik van cookies
Om de gebruiksvriendelijkheid van onze website te optimaliseren, maken wij gebruik van cookies.
Lees meer over de cookies die wij gebruiken en de gegevens die we daarmee verzamelen in onze cookie-policy.