Limits to Arbitrage During the Crisis: Funding Liquidity Constraints and Covered Interest Parity

Mancini-Griffoli, Thomas; Ranaldo, Angelo

doi:10.2139/ssrn.1549668

Cited by 34 publications

(15 citation statements)

References 51 publications

(15 reference statements)

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“…Not surprisingly, considering that Mancini Griffoli and Ranaldo (2012) and others have found liquidity to be an important driver of currency fluctuations during the global financial crisis, we find some significant liquidity effects, most notably that the CHF tends to depreciate against the USD as liquidity in the CHF/USD market increases, but only when uncertainty is relatively low (i.e. below the endogenously identified threshold).…”

Section: Robustnesssupporting

confidence: 47%

Intra-safe haven currency behavior during the global financial crisis

Fatum

Yamamoto

2016

Journal of International Money and Finance

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We investigate intra-safe haven currency behavior during the recent global financial crisis. The currencies we consider are the USD, the JPY, the CHF, the EUR, the GBP, the SEK, and the CAD. We first assess which safe haven currency appreciates the most as market uncertainty increases, i.e. we assess which safe haven currency is the "safest". We then use non-temporal threshold analysis to investigate whether intra-safe haven currency behavior changes, e.g. accelerates or decelerates, as market uncertainty increases. We find that the JPY is the "safest" of safe haven currencies and that only the JPY appreciates as market uncertainty increases regardless of the prevailing level of uncertainty. For all other currencies under study we find significant market uncertainty threshold effects. We extend our analysis to also consider intra-safe haven currency behavior before and after the global financial crisis. JEL codes: F31, G15

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Section: Robustnesssupporting

confidence: 47%

Intra-safe haven currency behavior during the global financial crisis

Fatum

Yamamoto

2016

Journal of International Money and Finance

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“…First, we show that stock market efficiency, rather than being a static concept, exhibits significant variation over time, and that different efficiency measures comove across individual stocks, as well as with each other. Second, we note that while prior work has studied the link between funding liquidity and market liquidity (e.g., Brunnermeier and Pedersen 2009;Hameed, Kang, and Viswanathan 2010), and between funding liquidity and specific arbitrage strategies in convertible bonds, mergers, covered interest parity, credit default swaps, and closed-end funds (e.g., Mitchell, Pedersen, and Pulvino 2007;Gârleanu and Pedersen 2011;Mancini-Griffoli and Ranaldo 2011;Mitchell and Pulvino 2012), our study demonstrates a connection between funding liquidity and the systematic component of commonly accepted efficiency measures for equities. Our results suggest that policy attempts to increase funding liquidity may not only have a direct impact on trading costs but also have an impact on the systematic degree of stock price efficiency.…”

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confidence: 58%

The Dynamics of Market Efficiency

Rösch

Subrahmanyam

Dijk

2016

The Review of Financial Studies

101

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We study the dynamics of high-frequency market efficiency measures. We provide evidence that these measures comove across stocks and with each other, suggesting the existence of a systematic market efficiency component. In vector autoregressions, we show that shocks to funding liquidity (the TED spread), hedge fund assets under management, and a proxy for algorithmic trading are significantly associated with systematic market efficiency. Thus, stock market efficiency is prone to systematic fluctuations, and, consistent with recent theories, events and policies that impact funding liquidity can affect the aggregate degree of price efficiency. (JEL G10, G14)In a financial market relatively free of frictions and of high quality (i.e., an "efficient" market), prices accurately reflect fundamentals, and, in doing so, obey the law of one price, by which assets with identical cash flows sell for the same price. The finance profession has mostly treated market efficiency as a static concept. The seminal taxonomy in Fama (1970) of weak-, semi-, and strong-form efficiency inspires debate on which of these best describes financialWe thank Stefan Nagel (the editor), two anonymous referees,

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“…For example, Sack (2010) discussed how the emergency liquidity provision facilities including the Term Asset Backed Securities Loan Facility (TALF) revitalized transactions in the securitized credit markets, and Mancini-Griffoli and Ranaldo (2010) showed that cross-border money market arbitrage opportunities were restored as soon as the exchange swap lines were established. Krishnamurthy and Vissing-Jorgensen (2010) estimated that QE1 decreased MBS yields by 150 basis points, and Hancock and Passmore (2011) estimated that its effect on the mortgage rate was almost 50 bps.…”

Section: Quantitative Easing Of the Usmentioning

confidence: 99%

Effects of Quantitative Easing on Asia: Capital Flows and Financial Markets

Cho¹,

Rhee

2014

Singapore Econ. Rev.

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Limits to Arbitrage During the Crisis: Funding Liquidity Constraints and Covered Interest Parity

Cited by 34 publications

References 51 publications

Intra-safe haven currency behavior during the global financial crisis

Intra-safe haven currency behavior during the global financial crisis

The Dynamics of Market Efficiency

Effects of Quantitative Easing on Asia: Capital Flows and Financial Markets

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