Naohiko Baba

From Turmoil to Crisis: Dislocations in the FX Swap Market Before and After the Failure of Lehman Brothers

This paper investigates dislocations in the foreign exchange (FX) swap market between the US dollar and three major European currencies. After the failure of Lehman Brothers in September 2008, deviations from covered interest parity (CIP) were negatively associated with the creditworthiness of US financial institutions (as well as that of European institutions), consistent with the deepening of a dollar liquidity problem into a global phenomenon. US dollar term funding auctions by the ECB, SNB, and BoE, as well as the US Federal Reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the FX swap market dislocations.

Dynamic Spillover of Money Market Turmoil from FX Swap to Cross-Currency Swap Markets: Evidence from the 2007–2008 Turmoil

This paper investigates the dynamic spillover of 2007–08 money market turmoil from short-term FX swap to the longer-term cross-currency swap markets. Under the turmoil, the short-term covered parity (CIP) deviation (FX swap deviation) and long-term CIP deviation (cross-currency swap price) are significantly in a one-on-one cointegrating relationship. The Granger test shows a significant causality from the short-term to long-term deviation. The bivariate GARCH model reveals a significant volatility spillover in the same direction and a substantial shift-up in conditional correlation. The principal component analysis shows that these deviations are driven largely by the factors that characterize the money market turmoil.

Default Intensity and Expected Recovery of Japanese Banks and "Government": New Evidence from the CDS Market

Using term structure data of Credit Default Swap (CDS) spreads for the four Japanese mega-banks and the government, we jointly estimate the default intensity and expected recovery (loss) given a default. In doing so, we attempt to further identify the difference in the expected recovery ratios between senior and subordinated CDS contracts. Estimation results are summarized as follows. (i) The default intensities for the banks and the government substantially rose in times of a banking crisis since the late 1990s. (ii) The expected recovery ratios for subordinated CDS contracts are significantly smaller than those for senior CDS contracts, ranging from 46 to 85 percent of those for senior CDSs, depending on the banks. (iii) Each banks default intensity is significantly cointegrated with, and reacts to, the Japanese governments default intensity. This result implies that a systemic risk factor among Japanese major banks is closely related to the default intensity of the Japanese government.

Are stock repurchases more flexible than dividends? The caseof Japanese firms

This article investigates the flexibility hypothesis of stock repurchases relative to dividends using the panel data of 577 Japanese firms. The estimation result of the partial adjustment model shows that the coefficient of adjustment speed towards the target payouts is higher for total payouts defined as the sum of dividends and stock repurchases (62.4%) than dividends only (34.3%). This result suggests that stock repurchases are more flexible than dividends in Japan.