Are Intermediary Constraints Priced ? ∗

@inproceedings{Du2019AreIC,
  title={Are Intermediary Constraints Priced ? ∗},
  author={Wenxin Du and Benjamin M Hebert and Amy Hsiu-Hua Wang},
  year={2019}
}
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… CONTINUE READING

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