The Non-U.S. Bank Demand for U.S. Dollar Assets

47 Pages Posted: 3 Mar 2020 Last revised: 14 Jul 2021

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Peichu Xie

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2020

Abstract

The USD asset share of non-U.S. banks captures the relative demand for USD denominated assets by these investors. An instrumental variable strategy identifies a causal link from the USD asset share to the USD exchange rate. Furthermore, cross-sectional asset pricing tests show that the USD asset share is a highly significant pricing factor for carry trade strategies. The USD asset share also forecasts the movement of foreign currency against U.S. dollar with economically large magnitude, high statistical significance, and large explanatory power, both in sample and out of sample, pointing towards time varying risk premia. It takes 2-5 years for exchange rate risk premia to normalize in response to demand shocks.

JEL Classification: F3, G1

Suggested Citation

Adrian, Tobias and Xie, Peichu, The Non-U.S. Bank Demand for U.S. Dollar Assets (February 2020). CEPR Discussion Paper No. DP14437, Available at SSRN: https://ssrn.com/abstract=3547370

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

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Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Peichu Xie

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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