Are Intermediary Constraints Priced?

Du, Wenxin; Hébert, Benjamin; Huber, Amy Wang

doi:10.3386/w26009

Cited by 28 publications

(26 citation statements)

References 50 publications

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“…in Du et al (2019). As we have shown in the conditional movements of cross-currency basis, countries with large negative imbalances have forwards that depreciate more than spot rates during a crisis (currency bases become more positive), whereas countries with positive imbalances have forwards that become more overvalued relative to spot rates (currency bases become more negative).…”

Section: Term Structure Of Cross-currency Basismentioning

confidence: 73%

“…Following Du et al (2019) that documents a trading strategy that exploits the maturity term structure of cross-currency basis, we show that the forward-starting cross-currency basis carry strategy has cross-sectional return variation that is aligned with external imbalances. We calculate the 1-year-forward-1-year cross-currency basis carry strategy 24 return that captures the roll-down and carry of the term-premia capture strategy strategy.…”

Section: B Carry Trade On Cross-currency Term Structurementioning

confidence: 86%

“…21 Du et al (2019) documents a profitable trading strategy using forwards on cross-currency basis swaps to exploit the term premia. We show in Appendix B that these relationships also align with countries external imbalances.…”

Section: Hedged Demand and Options-pricingmentioning

confidence: 99%

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The Hedging Channel of Exchange Rate Determination

Liao

Zhang

2020

SSRN Journal

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We document the exchange rate hedging channel that connects country-level measures of net external financial imbalances with exchange rates. In times of market distress, countries with large positive external imbalances (e.g. Japan) experience domestic currency appreciation, and crucially, forward exchange rates appreciate relatively more than the spot after adjusting for interest rate differentials. Countries with large negative foreign asset positions experience the opposite currency movements. We present a model demonstrating that exchange rate hedging coupled with intermediary constraints can explain these observed relationships between net external imbalances and spot and forward exchange rates. We find empirical support for this currency hedging channel of exchange rate determination in both the conditional and unconditional moments of exchange rates, option prices, large institutional investors' disclosure of hedging activities, and central bank swap line usage during the COVID-19 market turmoil.

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Section: Term Structure Of Cross-currency Basismentioning

confidence: 73%

Section: B Carry Trade On Cross-currency Term Structurementioning

confidence: 86%

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The Hedging Channel of Exchange Rate Determination

Liao

Zhang

2020

SSRN Journal

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“…A related line of inquiry that has focused on short-term borrowings and the financing of assets, emphasizes the supply of leverage by broker-dealers as a key determinant of asset prices both theoretically (Brunnermeier and Pedersen, 2008;He and Krishnamurthy, 2013;Adrian and Shin, 2010) and empirically (Adrian, Etula, and Muir, 2014;He, Kelly, and Manela, 2017;Du, Hébert, and Huber, 2019). Relative to these papers, our paper takes a bottom-up approach and examines the underbelly of intermediary leverage, by focusing on the role of GSIBs in intermediating short-term financing that supports the leverage of other financial institutions and determines asset prices.…”

Section: Related Literaturementioning

confidence: 99%

U.S. Banks and Global Liquidity

Correa

Liao³

2020

SSRN Journal

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We characterize how U.S. global systemically important banks (GSIBs) supply shortterm dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-lastresort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subsequent response of U.S. GSIBs to recent policy interventions by the Federal Reserve.

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“…Itskhoki and Mukhin (2021) and Itskhoki and Mukhin (2020) show that financial forces are at the core of real exchange rate dynamics and their disconnect from macro fundamentals. A strand of the literature has used market segmentation and convenience yields to understand CIP and its connection with exchange rates (see: Garleanu and Pedersen (2011); Du, Hébert and Huber (2019); Jiang, Krishnamurthy and Lustig (2018); Engel and Wu (2018)).…”

mentioning

confidence: 99%

International Macroeconomics With Imperfect Financial Markets

Maggiori¹

2021

Preprint

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A review of recent advances in open economy analysis under segmented international financial markets. A set of modeling tools that have been used to understand ?financialcrises, the ensuing policy response (e.g., Quantitative Easing and FX intervention), deviations from arbitrage (CIP deviations), and more generally the impact of capital flows on exchange rates. This modeling approach has also sheds a different light onclassic topics such as the exchange rate disconnect, international risk sharing, UIPfailures, and the carry trade.

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Are Intermediary Constraints Priced?

Cited by 28 publications

References 50 publications

The Hedging Channel of Exchange Rate Determination

The Hedging Channel of Exchange Rate Determination

U.S. Banks and Global Liquidity

International Macroeconomics With Imperfect Financial Markets

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