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Currency Mispricing and Dealer Balance Sheets

Gino Cenedese (), Pasquale Della Corte and Tianyu Wang

Journal of Finance, 2021, vol. 76, issue 6, 2763-2803

Abstract: We find dealer‐level evidence that recent regulation on the leverage ratio requirement causes deviations from covered interest parity. Our analysis uses a unique data set of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the U.K. leverage ratio framework. Dealers who are affected by the regulatory shock charge an additional premium of about 20 basis points per annum for synthetic dollar funding relative to unaffected dealers. This finding holds even after controlling for changes in clients' demand. Also, some clients increase their trading activity with unaffected dealers with whom they already had a preexisting relationship.

Date: 2021
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Working Paper: Currency Mispricing and Dealer Balance Sheets (2020) Downloads
Working Paper: Currency mispricing and dealer balance sheets (2019) Downloads
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Handle: RePEc:bla:jfinan:v:76:y:2021:i:6:p:2763-2803