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Foreign Exchange Dealer Asset Pricing

Author

Listed:
  • Stefan Reitz
  • Dennis Umlandt

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.

Suggested Citation

  • Stefan Reitz & Dennis Umlandt, 2019. "Foreign Exchange Dealer Asset Pricing," Working Paper Series 2019-08, University of Trier, Research Group Quantitative Finance and Risk Analysis.
    • Handle: RePEc:trr:qfrawp:201908
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    More about this item

    Keywords

    Carry Trades; FX Dealers; Currency Risk; Intermediary Asset Pricing;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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