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  • April 2023
  • Article
  • Review of Financial Studies

Are Intermediary Constraints Priced?

By: Wenxin Du, Benjamin Hebert and Amy Wang Huber
  • Format:Print
  • | Pages:44
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Abstract

Violations of no-arbitrage conditions measure the shadow cost of intermediary constraints. Intermediary asset pricing and intertemporal hedging together imply that the risk of these constraints tightening is priced. We describe a “forward CIP trading strategy” that bets on CIP violations shrinking and show that its returns help identify the price of this risk. This strategy yields the highest returns for currency pairs associated with the carry trade. The strategy’s risk substantially contributes to the volatility of the stochastic discount factor, is correlated with both other near-arbitrages and intermediary wealth measures, and appears to be consistently priced across various asset classes.

Keywords

Asset Pricing; Investment Return; Risk and Uncertainty; International Finance

Citation

Du, Wenxin, Benjamin Hebert, and Amy Wang Huber. "Are Intermediary Constraints Priced?" Review of Financial Studies 36, no. 4 (April 2023): 1464–1507.
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About The Author

Wenxin Du

Finance
→More Publications

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  • Counterparty Risk and Counterparty Choice in the Credit Default Swap Market By: Wenxin Du, Salil Gadgil, Michael Gordy and Clara Vega
  • NBIM and the Norwegian Sovereign Wealth Fund By: Luis M. Viceira and Wenxin Du
  • NBIM and the Norwegian Sovereign Wealth Fund By: Wenxin Du and Luis M. Viceira
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