CIP deviations, the dollar, and frictions in international capital markets

Du, Wenxin; Schreger, Jesse

doi:10.1016/bs.hesint.2022.03.001

Cited by 32 publications

(10 citation statements)

References 73 publications

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“…48 Many empirical studies analyze LIBOR CIP, even though LIBOR rates are indicative and may not be perceived as absolutely risk-free in all circumstances. However, analysis based on even less risky rates such as the Overnight Index Swap (OIS) rate yields similar conclusions (see Du and Schreger (2022)).…”

Section: Iiia Modeling the Dollar's Exchange Rate Against Advanced Ec...mentioning

confidence: 86%

“…U.S. monetary policy is especially powerful in this regard, 15 See, for example, Canzoneri and others (2008), Krishnamurthy and Vissing-Jorgensen (2012), Nagel (2016), and Del Negro and others (2017). Du and Schreger (2022) and Maggiori (2022) provide recent surveys of models with financial market imperfections. In these models, global "risk off" episodes propagate through various channels, for example, increasing demand for asset safety and liquidity or, even in models where investors are risk neutral, constricting leverage due to tighter value-at-risk constraints (as in Adrian and Shin (2013)).…”

Section: Ic Financial Market Experience and Exchange Ratesmentioning

confidence: 99%

“…Especially in the presence of frictions, the "separability" of U.S. Treasury attributes one might be tempted to infer from the idealized version of equation ( 12) is implausible. For example, the depth of balance sheet capacity and deviations from CIP, as discussed by Du (2019) and Du and Schreger (2022). Conversely, Federal Reserve swaps of dollars with foreign central banks, which lend the dollars to domestic banks with constrained alternative dollar access, have limited basis spreads by effectively "filling in" for scarce private balance-sheet space (see Bahaj and Reis (2021) and Goldberg and Ravazzolo (2022)).…”

Section: Iiib Covered Interest Parity and The Us Dollar Liquidity Pre...mentioning

confidence: 99%

“…The U.S. dollar basis has generally been negative for the Australian and New Zealand dollars, for reasons elucidated byBorio and others (2016) andLiao and Zhang (2020). For a broad discussion of the literature on deviations from CIP, seeDu and Schreger (2022). Note that the literature generally defines the U.S. dollar basis with a sign opposite to our convention.…”

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confidence: 95%

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The Global Dollar Cycle

Obstfeld¹,

Zhou²

2023

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The U.S. dollar's nominal effective exchange rate closely tracks global financial conditions, which themselves show a cyclical pattern. Over that cycle, world asset prices, leverage, and capital flows move in concert with global growth, especially influencing the fortunes of emerging and developing economies (EMDEs). This paper documents that dollar appreciation shocks predict economic downturns in EMDEs and highlights policies countries could implement to dampen the effects of dollar fluctuations. Dollar appreciation shocks themselves are highly correlated not just with tighter U.S. monetary policies, but also with measures of U.S. domestic and international dollar funding stress that themselves reflect global investors' risk appetite. After the initial market panic and upward dollar spike at the start of the COVID-19 pandemic, the dollar fell as global financial conditions eased; but the higher inflation that followed has induced central banks everywhere to tighten monetary policies more recently. The dollar has strengthened considerably since mid-2021 and a contractionary phase of the global financial cycle is now under way. Owing to increases in public-and business-sector debts during the pandemic, a strong dollar, higher interest rates, and slower economic growth will be challenging for EMDEs.

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Section: Iiia Modeling the Dollar's Exchange Rate Against Advanced Ec...mentioning

confidence: 86%

Section: Ic Financial Market Experience and Exchange Ratesmentioning

confidence: 99%

Section: Iiib Covered Interest Parity and The Us Dollar Liquidity Pre...mentioning

confidence: 99%

mentioning

confidence: 95%

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The Global Dollar Cycle

Obstfeld¹,

Zhou²

2023

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“…2 Existing literature disagrees, however, about the types of frictions that matter for explaining CIP deviations. See Du and Schreger (2022) for a review.…”

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confidence: 99%

The Term Structure of Covered Interest Rate Parity Violations

AUGUSTIN,

CHERNOV,

SCHMID

et al. 2024

The Journal of Finance

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We quantify the impact of risk‐based and nonrisk‐based intermediary constraints (IC) on the term structure of covered interest rate parity (CIP) violations. Using a stochastic discount factor (SDF) inferred from interest rate swaps, we value currency derivatives. The wedge between model‐implied and observed derivative prices reflects the impact of nonrisk‐based IC because our SDF incorporates risk‐based IC. There is no wedge at short horizons, while the wedge accounts for 40% of long‐term CIP violations. Consistent with IC theory, the wedge correlates with the shadow cost of intermediary capital, and the SDF‐implied interest rate is a weighted average of collateralized and uncollateralized interest rates.

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Dominant Currency Paradigm: a review

Gopinath

Itskhoki

2022

Handbook of International Economics: International Macroeconomics, Volume 6

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CIP deviations, the dollar, and frictions in international capital markets

Cited by 32 publications

References 73 publications

The Global Dollar Cycle

The Global Dollar Cycle

The Term Structure of Covered Interest Rate Parity Violations

Dominant Currency Paradigm: a review

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