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Working Paper
Quantities and Covered-Interest Parity
Studies of intermediated arbitrage argue that bank balance sheets are an important consideration, yet little evidence exists on banks’ positioning in this context. Using confidential supervisory data (covering $25 trillion in daily notional exposures) we examine banks’ positions in connection with covered-interest parity (CIP) deviations. Exploiting cross-sectional variation in CIP deviations that have largely challenged existing theories, we document three novel forces that drive bases: 1) foreign safe asset scarcity, 2) market power and segmentation of banks specializing in different ...
Discussion Paper
The Effects of Entering and Exiting a Credit Default Swap Index
Since their inception in 2002, credit default swap (CDS) indexes have gained tremendous popularity and become leading barometers of the credit market. Today, investors who want to hedge credit risk or to speculate can choose from a broad menu of indexes that offer protection against the default of a firm, a European sovereign, or a U.S. municipality, among others. The major CDS indexes in the U.S. are the CDX.NA.IG and the CDX.NA.HY, composed of North American investment-grade (IG) and high-yield (HY) issuers, respectively. In this post, we focus on the CDX.NA.IG index. We discuss the ...