Quantities and Covered-Interest Parity

Tobias J. Moskowitz (), Chase P. Ross, Sharon Y. Ross and Kaushik Vasudevan ()
Additional contact information
Tobias J. Moskowitz: https://som.yale.edu/faculty-research/faculty-directory/tobias-j-moskowitz
Chase P. Ross: https://www.federalreserve.gov/econres/chase-p-ross.htm
Sharon Y. Ross: https://www.federalreserve.gov/econres/sharon-y-ross.htm
Kaushik Vasudevan: https://business.purdue.edu/directory/bio.php?username=kvasude

No 2024-061, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Studies of intermediated arbitrage argue that bank balance sheets are an important consideration, yet little evidence exists on banks’ positioning in this context. Using confidential supervisory data (covering $25 trillion in daily notional exposures) we examine banks’ positions in connection with covered-interest parity (CIP) deviations. Exploiting cross-sectional variation in CIP deviations that have largely challenged existing theories, we document three novel forces that drive bases: 1) foreign safe asset scarcity, 2) market power and segmentation of banks specializing in different markets, and 3) concentration of demand. Our findings shed empirical light on the interplay of frictions influencing banks’ provision of dollar funding.

Keywords: Basis; Covered-interest parity deviation; Foreign exchange; Safe assets (search for similar items in EconPapers)
JEL-codes: F30 F31 F65 G10 G13 G15 G20 G23 (search for similar items in EconPapers)
Pages: 93 p.
Date: 2024-08-02
New Economics Papers: this item is included in nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-61

DOI: 10.17016/FEDS.2024.061

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