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Currency mispricing and dealer balance sheets

Gino Cenedese (), Pasquale Della Corte () and Tianyu Wang ()
Additional contact information
Pasquale Della Corte: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Tianyu Wang: Tsinghua University

No 779, Bank of England working papers from Bank of England

Abstract: We relate currency mispricing originating from the breakdown of covered interest rate parity to the dealer balance-sheet constraints resulting from the post-crisis financial regulation. Using a unique data set on contract-level foreign exchange derivatives with disclosed counterparty identities, we find that dealers with a higher leverage ratio demand an additional premium from their clients for synthetic dollar funding. We handle endogeneity using two exogenous variations associated with the public disclosure of the leverage ratio, and the introduction of the UK leverage ratio framework while controlling for changes in demand conditions at the client level.

Keywords: Exchange rates; dollar basis covered interest parity condition; arbitrage opportunities. (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2019-02-15
New Economics Papers: this item is included in nep-acc
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Citations: View citations in EconPapers (38) Track citations by RSS feed

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Related works:
Journal Article: Currency Mispricing and Dealer Balance Sheets (2021) Downloads
Working Paper: Currency Mispricing and Dealer Balance Sheets (2020) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0779

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