Dealer leverage and exchange rates: Heterogeneity across intermediaries

Ricardo Correa and Laurie DeMarco

Journal of Banking & Finance, 2025, vol. 174, issue C

Abstract: We find that the leverage of primary dealers has predictive power in forecasting exchange rates, but that it varies by a novel type of heterogeneity, the dealer’s headquarter jurisdiction, and over time. The leverage of foreign-headquartered dealers in the U.S. drives the predictive power for exchange rates, while it is insignificant for U.S.-headquartered dealers. We propose this heterogeneity can be explained by the relative balance sheet capacity of foreign dealers compared to domestic dealers and how that capacity changes over time with regulation. Furthermore, we document that currency market positions are stronger than cross-border lending as the channel through which leverage affects exchange rates.

Keywords: Exchange rates; Intermediaries; International finance; Leverage cycles; Primary dealers (search for similar items in EconPapers)
JEL-codes: F30 F31 G12 G24 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:174:y:2025:i:c:s0378426625000214

DOI: 10.1016/j.jbankfin.2025.107400

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