Currency Mispricing and Dealer Balance Sheets

Pasquale Della Corte, Gino Cenedese () and Tianyu Wang

No 15569, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 dataset of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the UK leverage ratio framework. Dealers that 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 pre-existing relationship.

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)
Date: 2020-12
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Currency Mispricing and Dealer Balance Sheets (2021)
Working Paper: Currency mispricing and dealer balance sheets (2019)
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