DP15569 Currency Mispricing and Dealer Balance Sheets
|Author(s):||Gino Cenedese, Pasquale Della Corte, Tianyu Wang|
|Publication Date:||December 2020|
|Keyword(s):||arbitrage opportunities, covered interest parity condition, dollar basis, Exchange Rates|
|JEL(s):||F31, G12, G15|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15569|
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.