Abstract To understand deviations from covered interest parity (CIP), it is crucial to account for heterogeneity in funding costs across both banks and currency areas. For most market participants, the no-arbitrage relation holds fairly well when implemented using marginal risk-free investment instruments. However, a few high-rated do enjoy CIP-arbitrage opportunities. Dealers avert inventory imbalances stemming lower-rated banks’ usage of FX swaps obtain dollar by inducing opposite...

This paper studies the violation of most basic no-arbitrage condition in international finance — Covered Interest Parity (CIP). We find that CIP puzzle largely stems from funding liquidity differences, reflected marginal rates main arbitrageurs. With severe it becomes impossible for FX swap intermediaries to quote prices such holds across full rate spectrum. A narrow set global top-tier banks enjoys risk-less arbitrage opportunities as dealers quotes avert order flow imbalances. situation...

This paper investigates the presence and characteristics of arbitrage opportunities in foreign exchange market using a unique data set for three major capital markets that covers period more than seven months at tick frequency, obtained from Reuters on special order. We provide evidence size duration round-trip one-way real time. The analysis unveils existence numerous short-lived opportunities, whose is economically significant across rates comparable different maturities instruments...

The relationship between volume and volatility has received much attention in the literature on financial markets. However, due to lack of data, few results have been presented for foreign exchange (FX) market. Furthermore, most studies contain only aggregate series, cannot distinguish impact different participants or instruments. We study FX market using a unique data set daily trading Swedish krona (SEK) covers 95 percent worldwide SEK trading, is disaggregated number reporting banks'...

We investigate the relation between foreign exchange (FX) order flow and forward bias. outline a decomposition of bias according to which negative correlation interest rate differentials creates time‐varying risk premium consistent with that Using 10 years data on FX flow, we find more than half is accounted for by flow—with rest being explained expectational errors. also carry trading increases currency‐crash in generates skewness returns.

This paper adds to the research efforts that aim bridge divide between macro and micro approaches exchange rate economics by examining linkages foreign order flow, expectations of macroeconomic variables, movements. The basic hypothesis tested is if flow reflects heterogeneous beliefs about fundamentals, currency markets learn state economy gradually, then can have both explanatory forecasting power for rates. Using one year high frequency data collected via a live feed from Reuters three...

Electronic trading has transformed foreign exchange markets over the past decade, and pace of innovation only accelerates. This formerly opaque market is now fairly transparent transaction costs are a fraction their former level. Entirely new agents have joined fray, including retail high-frequency traders, while volumes tripled. Market concentration among dealers risen reflecting heavy investments in technology. Undeterred, some non-bank participants begun to make markets, challenging...

This paper provides an empirical test of the scapegoat theory exchange rates (Bacchetta and van Wincoop 2004, 2013). suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as "scapegoats" rationalize observed currency fluctuations at times when driven by unobservable shocks. Using novel survey data directly measure foreign scapegoats for 12 rates, coupled with on transactions, we find evidence strongly supports theory. The...