Title: Analysing cross-currency basis spreads
Authors: Jiri Witzany - University of Economics in Prague (Czech Republic) [presenting]
Jaroslav Baran - University of Economics (Czech Republic)
Abstract: The aim is to investigate drivers of cross-currency basis spreads that were historically close to zero but widened significantly since the start of the financial crisis. By constructing arbitrage-free boundaries we discover that for the example of EUR/USD and EUR/CZK FX currency pairs, the supply and demand imbalances may push basis spreads outside the boundaries. We also build a multiple regression and a cointegration model explaining drivers behind the EUR/USD basis swap spreads. The most important drivers of the cross-currency basis spreads appear to be short-term and long-term US and EU financial sectors credit risk indicators, Fed/ECB balance sheet ratio, EUR/USD exchange rate, or the market volatility.