NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Amy Wang Huber

Stanford University Graduate School of Business
PhD Office
650 Knight Way
Stanford, CA 94305

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Institutional Affiliation: Stanford University

NBER Working Papers and Publications

June 2019Are Intermediary Constraints Priced?
with Wenxin Du, Benjamin M. Hébert: w26009
Violations of no-arbitrage conditions measure the shadow cost of constraints on intermediaries, and the risk that these constraints tighten is priced. We demonstrate in an intermediary-based asset pricing model that violations of no-arbitrage such as covered interest rate parity (CIP) violations, along with intermediary wealth returns, can be used to price assets. We describe a “forward CIP trading strategy” that bets on CIP violations becoming smaller, and show that its returns help identify the price of the risk that the shadow cost of intermediary constraints increases. This risk contributes substantially to the volatility of the stochastic discount factor, and appears to be priced consistently in U.S. treasury, emerging market sovereign bond, and foreign exchange portfolios.
 
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