The dollar, bank leverage and the deviation from covered interest parity

Stefan Avdjiev, Wenxin Du, Catherine Koch and Hyun Song Shin
Authors registered in the RePEc Author Service: Catherine Tahmee Casanova

No 592, BIS Working Papers from Bank for International Settlements

Abstract: We document the triangular relationship formed by the strength of the US dollar, cross-border bank lending in dollars and deviations from covered interest parity (CIP). A stronger dollar goes hand-in-hand with bigger deviations from CIP and contractions of cross-border bank lending in dollars. Differential sensitivity of CIP deviations to the strength of the dollar can explain cross-sectional variations in CIP arbitrage profits. We argue that underpinning the triangle is the role of the dollar as proxy for the shadow price of bank leverage.

Keywords: exchange rates; bank leverage; cross-currency basis (search for similar items in EconPapers)
Pages: 43 pages
Date: 2016-11
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Citations: View citations in EconPapers (70)

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Related works:
Journal Article: The Dollar, Bank Leverage, and Deviations from Covered Interest Parity (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:592

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