Currency returns and FX dealer balance sheets

• 成果类型: Article
• 署名作者: Reitz, Stefan; Umlandt, Dennis
• 署名单位: University of Kiel; Leibniz Association; Institut fur Weltwirtschaft an der Universitat Kiel (IFW); Universitat Trier
• 刊物名称: JOURNAL OF INTERNATIONAL ECONOMICS
• ISSN/ISSBN: 0022-1996
• DOI: 10.1016/j.jinteco.2021.103541
• 发表日期: 2021
• 关键词: Carry trades; FX dealers; Currency pricing; Balance sheet risk

摘要

We show that excess returns to the carry trade can be interpreted as compensation for foreign exchange dealers' capital risk. Given that the top market makers in foreign exchange are at the heart of the market's information aggregation process we also suggest that it is their marginal value of wealth which prices FX portfolio returns. Consistent with this hypothesis the empirical results show that shocks to the equity capital ratios of the top three foreign exchange dealers have explanatory power for the cross-sectional variation in expected currency returns, while those of the average dealer provide no substantial additional information. (c) 2021 Elsevier B.V. All rights reserved.