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Intermediaries and Asset Returns

Paper Session

Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Harbor A
Hosted By: American Finance Association
  • Chair: Dimitris Papanikolaou, Northwestern University

Dominant Currency Debt

Semyon Malamud
,
Swiss Federal Institute of Technology-Lausanne (EPFL)
Egemen Eren
,
Bank for International Settlements

Abstract

We propose a "debt view" to explain the dominant international role of the dollar and provide broad empirical support for it. Within a simple capital structure model in which firms optimally choose the currency composition of their debt, we derive conditions under which all firms issue debt in a single, "dominant" currency. Theoretically, it is the currency that depreciates in global downturns over horizons of typical corporate debt maturity. Both forward-looking and historical covariances suggest that dollar fits this description better than all major currencies, especially for longer horizons. The debt view can jointly explain the fall and the rise of the dollar in international debt markets over the last two decades.

Are Intermediary Constraints Priced?

Wenxin Du
,
University of Chicago
Benjamin Hebert
,
Stanford University
Amy Wang Huber
,
Stanford University

Abstract

Violations of no-arbitrage conditions measure the shadow cost of constraints on intermediaries, and the risk that these constraints tighten is priced. We demonstrate in an intermediary-based asset pricing model that violations of no-arbitrage such as covered interest rate parity (CIP) violations, along with intermediary wealth returns, can be used to price assets. We describe a “forward CIP trading strategy” that bets on CIP violations becoming smaller, and show that its returns help identify the price of the risk that the shadow cost of intermediary constraints increases. This risk contributes substantially to the volatility of the stochastic discount factor, and appears to be priced consistently in U.S. treasury, emerging market sovereign bond, and foreign exchange portfolios.

Interest Arbitrage under Capital Controls: Evidence from Reported Entrepôt Trades

Jiafei Hu
,
University of Queensland
Haishan Yuan
,
University of Queensland

Abstract

Capital controls segment the offshore credit market of Chinese renminbi from the onshore one. Using a novel administrative data set, we provide evidence that firms arbitrage the onshore-offshore interest differentials using bank-intermediated "entrepôt trades," which supposedly re-export imports with little or no processing. Onshore-offshore interest differentials drive renminbi's inflows from "entrepôt trades," which strongly predict one-year forward outflows settling bank-issued Letters of Credit. Interest differentials have greater impacts on the lower half of the outflows distribution and induce entries to "entrepôt trades." Our findings suggest that renminbi interest arbitrages are feasible but costly under capital controls.
Discussant(s)
Zhengyang Jiang
,
Northwestern University
Valentin Haddad
,
University of California-Los Angeles
Lorena Keller
,
University of Pennsylvania
Lawrence Schmidt
,
Massachusetts Institute of Technology
JEL Classifications
  • G1 - General Financial Markets