Are Intermediary Constraints Priced?

112 Pages Posted: 1 Jul 2019 Last revised: 30 Aug 2021

See all articles by Wenxin Du

Wenxin Du

University of Chicago Booth School of Business

Benjamin Hebert

Stanford University

Amy Wang

Stanford University

Date Written: June 2019


Violations of no-arbitrage conditions measure the shadow cost of intermediary constraints. Intermediary asset pricing and intertemporal hedging together imply that the risk of these constraints tightening is priced. We describe a “forward CIP trading strategy” that bets on CIP violations shrinking and show that its returns help identify the price of this risk. This strategy yields the highest returns for currency pairs associated with the carry trade. The strategy’s risk contributes substantially to the volatility of the stochastic discount factor, is correlated with both other near-arbitrages and intermediary wealth measures, and appears to be priced consistently across various asset classes.

Suggested Citation

Du, Wenxin and Hebert, Benjamin M. and Wang, Amy, Are Intermediary Constraints Priced? (June 2019). NBER Working Paper No. w26009, Available at SSRN:

Wenxin Du (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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Benjamin M. Hebert

Stanford University ( email )

Stanford, CA 94305
United States

Amy Wang

Stanford University ( email )

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