Foreign Exchange Dealer Asset Pricing

Stefan Reitz and Dennis Umlandt

No 2019-08, Working Paper Series from University of Trier, Research Group Quantitative Finance and Risk Analysis

Abstract: We show that excess returns to the carry trade can be interpreted as compensationfor foreign exchange dealers’ capital risk. Given that the top market makers inforeign exchange are at the heart of the market’s information aggregation process wealso suggest that it is their marginal value of wealth which prices foreign currencies.Consistent with this hypothesis the empirical results show that shocks to the equitycapital ratios of the top three foreign exchange dealers have explanatory power forthe cross-sectional variation in expected currency market returns, while those of theaverage dealer provide no substantial additional information.

Keywords: Carry Trades; FX Dealers; Currency Risk; Intermediary Asset Pricing (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2019
New Economics Papers: this item is included in nep-ifn
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Working Paper: Foreign exchange dealer asset pricing (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:trr:qfrawp:201908

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