Quantities and Covered-Interest Parity

91 Pages Posted: 7 May 2024

See all articles by Tobias J. Moskowitz

Tobias J. Moskowitz

AQR Capital; Yale University, Yale SOM; National Bureau of Economic Research (NBER)

Chase P. Ross

Board of Governors of the Federal Reserve System

Sharon Y. Ross

Board of Governors of the Federal Reserve System

Kaushik Vasudevan

Mitchell E. Daniels, Jr School of Business, Purdue University

Date Written: May 7, 2024

Abstract

Studies of intermediated arbitrage argue that bank balance sheets are an important consideration, yet little evidence exists on banks' positioning in this context. Using confidential supervisory data—covering $25 trillion in daily notional exposures—we examine banks' positions in connection with covered-interest parity (CIP) deviations. Exploiting cross-sectional variation in CIP deviations that has largely presented a puzzle to existing theories, we document the importance of three novel forces: 1) foreign safe asset scarcity, 2) market power and segmentation of banks specializing in different markets, and 3) concentration of demand. Our findings shed empirical light on the interplay of frictions influencing banks' global provision of dollar funding.

Keywords: basis, covered-interest parity deviation, foreign exchange, safe assets

JEL Classification: F3, F31, F65, G1, G13, G15, G2, G23

Suggested Citation

Moskowitz, Tobias J. and Moskowitz, Tobias J. and Ross, Chase P. and Ross, Sharon and Vasudevan, Kaushik, Quantities and Covered-Interest Parity (May 7, 2024). Available at SSRN: https://ssrn.com/abstract=4820243 or http://dx.doi.org/10.2139/ssrn.4820243

Tobias J. Moskowitz

Yale University, Yale SOM ( email )

493 College St
New Haven, CT CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chase P. Ross (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sharon Ross

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sharonyross.com

Kaushik Vasudevan

Mitchell E. Daniels, Jr School of Business, Purdue University ( email )

403 Mitch Daniels Blvd.
West Lafayette, IN 47907
United States

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