Conference Agenda

We empirically test Gabaix and Maggiori (2015)'s prediction that currencies are repriced by the country's external capital dependence when financial constraints of FX intermediaries change. Using solvency indicators, we develop a novel intermediary constraints index capturing risk-bearing capacity. We find that constraints are a priced risk factor in currency portfolios sorted by countries' net foreign assets. Portfolios of external debtors (creditors) have higher (lower) intermediary risk premia, but pay lower (higher) returns when constraints tighten. Tightening constraints are associated with a depreciation of countries with low net foreign assets, particularly emerging markets with high net debt and low FX reserves.

While Federal Reserve swap lines are now the primary policy tool for easing offshore U.S. dollar borrowing cost during times of stress, its pass-through to the FX market remains poorly understood, largely due to a lack of data on the OTC FX swap market. Using a bespoke settlement dataset, I conduct the first comprehensive empirical study of agent positioning in FX swaps around swap-line take-ups globally across jurisdictions, currencies and time. I show that swap lines lower U.S. dollar borrowing cost not only through a reduction in non-U.S. bank demand for U.S. dollar (substitution channel), as is commonly thought, but also through an increase in U.S. dollar supply (arbitrage channel). My results offer novel policy implications.

We examine violations of uncovered interest parity (UIP) in high frequency, accounting for the discrete nature of interest rate payments in foreign exchange markets. Exploiting both regression- and portfolio-based tests, we do not reject UIP during overnight trading but strongly do so during the U.S. intraday period. Furthermore, we document a strong divergence in excess returns for currency trading strategies exploiting UIP violations on announcement versus non-announcement days. The cross-sectional carry strategy earns the bulk of its excess returns on macro and FOMC days, whereas the dollar carry strategy generates positive returns on non-announcement days and depreciates on announcement days.