The widening of cross-currency basis: When increased FX swap demand meets limits of arbitrage

• 成果类型: Article
• 署名作者: Ben Zeev, Nadav; Nathan, Daniel
• 署名单位: Ben-Gurion University of the Negev; University of Pennsylvania; Bank of Israel
• 刊物名称: JOURNAL OF INTERNATIONAL ECONOMICS
• ISSN/ISSBN: 0022-1996
• DOI: 10.1016/j.jinteco.2024.103984
• 发表日期: 2024
• 关键词: LOA-dependent FX swap demand channel; Cross-currency basis; Limits of arbitrage; Granular instrumental variable; Bartik instrument; Open FX swap position; institutional investors

摘要

This paper examines customer demand-side factors that affect deviation from covered interest rate parity (CIP) with respect to the dollar ( i.e. , cross-currency basis), particularly when arbitrageurs are constrained. Using novel detailed daily transaction-level data on the universe of Israeli institutional investors (IIs), we employ a granular instrumental variable (GIV) estimation to investigate how IIs' FX swap demand affects CIP deviation. Our findings demonstrate that a one standard deviation shock to IIs' FX swap demand when capital is abundant has no effect on IIs' basis. However, when capital is scarce, the demand shock produces a significant reduction of 12 basis points in IIs' basis. Our results showcase how limits of arbitrage, together with demand shocks from a large customer base, can drive CIP deviations.