Network analysis reveals Euro-centered shock spillovers across 25 cross-currency basis swap spreads, highlighting systemic vulnerability tied to structural dealer centrality.
We develop a novel network-based framework that treats cross-currency basis swap spreads as reflecting currency- and tenor-specific inventory frictions, cross-linkages of currencies on shared balance sheets, and global funding tightness that spikes during crises. The framework delivers several theoretical predictions that anchor our empirical analysis: (i) basis spreads for USD-pegged currencies exhibit muted volatility and rarely transmit shocks; (ii) longer-tenor bases display lower volatility and weaker spillovers than their short-tenor counterparts; (iii) crisis episodes amplify comovement across currencies; and (iv) spillover transmission is governed by structural centrality within the dealer-linkage network. We test these predictions using cross-currency basis swap spreads across 25 currencies (the largest empirical study of its kind), estimated via a Bayesian graphical SVAR that uncovers a sparse, directed spillover network. The evidence supports all four theoretical predictions: pegged currencies remain insulated and transmit minimal shocks; volatility and contagion diminish with maturity; interconnectedness surges during crises; and the transmission of shocks is Euro-centred, with the Swiss franc and Danish krone closely following the Euro in systemic importance.
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Ahelegbey et al. (2026) studied this question.
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