An Intermediation-Based Model of Exchange Rates

85 Pages Posted: 6 Mar 2018 Last revised: 5 Sep 2018

See all articles by Semyon Malamud

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

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Date Written: June 5, 2018

Abstract

We develop a general equilibrium model with intermediaries at the heart of international financial markets. In our model, intermediaries bargain with their customers and extract rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, generates an explicit, non-linear risk structure in exchange rates. We show how this endogenous risk structure helps explain a number of anomalies in foreign exchange and international capital markets, including the safe haven properties of exchange rates and the breakdown of covered interest parity.

Keywords: exchange rates, dollar, covered interest parity deviations, currency skew, currency crashes

JEL Classification: E44, E52, F31, F33, G13, G15, G23

Suggested Citation

Malamud, Semyon and Schrimpf, Andreas, An Intermediation-Based Model of Exchange Rates (June 5, 2018). Swiss Finance Institute Research Paper No. 18-14. Available at SSRN: https://ssrn.com/abstract=3134347 or http://dx.doi.org/10.2139/ssrn.3134347

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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