Quantities and Covered-Interest Parity

Tobias J. Moskowitz, Chase Ross, Sharon Y. Ross and Kaushik Vasudevan

No 32707, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F3 F31 G1 G11 G12 G15 G2 G20 G21 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-ifn
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