Non-Fundamental Flows and Foreign Exchange Rates

Felipe E. Aldunate, Zhi Da, Borja Larrain () and Clemens Sialm

No 30753, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Frequent, yet uninformed, fund flows in Chilean pension plans generate substantial trading in currency markets due to the high allocation to international securities. These non-fundamental flows have a significant impact on the Chilean peso, which is estimated to have a relatively low price elasticity of 0.81. Hedging by the banking sector propagates the price pressure to currency forward markets and results in violations of the covered interest rate parity. Using trading data and bank balance sheet data, we confirm that regulatory requirements and banks’ risk bearing constraints create limits of arbitrage.

JEL-codes: F31 F32 F33 G11 G15 G21 G23 G40 G51 H55 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ban, nep-ifn and nep-mon
Note: AG AP CF PE
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