Are Intermediary Constraints Priced?

Wenxin Du, Benjamin Hebert and Amy Wang
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Wenxin Du: University of Chicago
Amy Wang: Stanford University

Research Papers from Stanford University, Graduate School of Business

Abstract: Violations of no-arbitrage conditions measure the shadow cost of constraints on intermediaries, and the risk that these constraints tighten is priced. We demonstrate in an intermediary-based asset pricing model that violations of no-arbitrage such as covered interest rate parity (CIP) violations, along with intermediary wealth returns, can be used to price assets. We describe a “forward CIP trading strategy†that bets on CIP violations becoming smaller, and show that its returns help identify the price of the risk that the shadow cost of intermediary constraints increases. This risk contributes substantially to the volatility of the stochastic discount factor, and appears to be priced consistently in U.S. treasury, emerging market sovereign bond, and foreign exchange portfolios.

Date: 2019-03
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Are Intermediary Constraints Priced? (2023)
Working Paper: Are Intermediary Constraints Priced? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3770

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