Limits to Arbitrage During the Crisis: Funding Liquidity Constraints and Covered Interest Parity
Speaker
Abstract
| Arbitrage normally ensures that covered interest parity (CIP) holds. Until recently, excess profits, if any, were documented to last merely minutes. Instead, this paper funds that following the Lehman bankruptcy, these were large, persisted for months and involved strategies short in dollars. But few were the traders able to reap these profits. The constraint did not arise from elevated risks, but from insufficient funding liquidity in dollars. These results stem from an empirical analysis drawing on a novel data set of multiple daily snapshots of synchronous prices including transaction costs, over particularly liquid securities and different maturities. |
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Angelo Ranaldo is an Economic Advisor at the Swiss National Bank. He is member of the research unit and senior management. His undergraduate studies in economics were conducted at the University Bocconi. He obtained his doctorate at the University of Fribourg (Switzerland). He was a Visiting Scholar at the New York University (Stern School of Business), a Visiting Professor at the University of Aarhus (Denmark) and a Visiting Senior Economist at the Federal Reserve Bank of New York. He is a lecturer at the University of Zurich and at the Gerznesee Study Center. His papers have been published in several peer-reviewed and scholarly journals. |
| Contact information: |
| Dr. Erik Kole |
