Currency Mispricing and Dealer Balance Sheets

55 Pages Posted: 19 Feb 2019

See all articles by Gino Cenedese

Gino Cenedese

Fulcrum Asset Management

Pasquale Della Corte

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Tianyu Wang

Tsinghua University

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2019

Abstract

We relate currency mispricing originating from the breakdown of covered interest rate parity to the dealer balance-sheet constraints resulting from the post-crisis financial regulation. Using a unique data set on contract-level foreign exchange derivatives with disclosed counterparty identities, we find that dealers with a higher leverage ratio demand an additional premium from their clients for synthetic dollar funding. We handle endogeneity using two exogenous variations associated with the public disclosure of the leverage ratio, and the introduction of the UK leverage ratio framework while controlling for changes in demand conditions at the client level.

Keywords: exchange rates, dollar basis covered interest parity condition, arbitrage opportunities

JEL Classification: F31, G12, G15

Suggested Citation

Cenedese, Gino and Della Corte, Pasquale and Wang, Tianyu, Currency Mispricing and Dealer Balance Sheets (February 15, 2019). Bank of England Working Paper No. 779. Available at SSRN: https://ssrn.com/abstract=3335265 or http://dx.doi.org/10.2139/ssrn.3335265

Gino Cenedese

Fulcrum Asset Management ( email )

66 Seymour Street
London, W1H 5BT
United Kingdom

Pasquale Della Corte (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom
+44(0)20 759 49331 (Phone)

HOME PAGE: http://sites.google.com/view/pasqualedellacorte

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tianyu Wang

Tsinghua University ( email )

Beijing, 100084
China

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