Are Intermediary Constraints Priced? / Wenxin Du, Benjamin M. Hébert, Amy Wang Huber.

Format:

Book

Author/Creator:

Du, Wenxin.

Contributor:

National Bureau of Economic Research.

Hébert, Benjamin M.

Huber, Amy Wang.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26009.

NBER working paper series no. w26009

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

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.

Notes:

Print version record

June 2019.