Connectedness of G10 Cross-Currency Basis Derivatives Markets

This article examines interconnectedness in the use of currency derivatives for hedging currency risk in the international fixed income trading process. Specifically, it investigates the degree of connectedness among major cross-currency basis swap markets, identifies which markets are the main source of shocks to others, and determines which markets are the primary recipients of these shocks. To measure the degree of connectedness, the article employs the Diebold-Yilmaz measure. The findings indicate that the EUR/USD basis swap market is the dominant net giver of shocks to other basis swap markets, while it is the least recipient of shocks from others. Therefore, the article concludes that in the context of G10 basis swap spreads, the EUR basis or currency derivative is the most critical factor to monitor when hedging foreign exchange exposures using cross-currency swaps. So, its use is paramount.