Risk appetite and exchange rates

Arbeitspapier

We present evidence that the growth of U.S.-dollar-denominated banking sector liabilities forecasts appreciations of the U.S. dollar, both in-sample and out-of-sample, against a large set of foreign currencies. We provide a theoretical foundation for a funding liquidity channel in a global banking model where exchange rates fluctuate as a function of banks' balance sheet capacity. We estimate prices of risk using a cross-sectional asset pricing approach and show that the U.S. dollar funding liquidity forecasts exchange rates because of its association with time-varying risk premia. Our empirical evidence shows that this channel is separate from the more familiar "carry trade" channel. Although the financial crisis of 2007-09 induced a structural shift in our forecasting variables, when we control for this shift, the forecasting relationship is preserved.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 750

Classification and Topics

• Classification: Wirtschaft ; International Finance: General ; Foreign Exchange ; Asset Pricing; Trading Volume; Bond Interest Rates ; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
• Subject: asset pricing ; financial intermediaries ; exchange rates

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adrian, Tobias ; Etula, Erkko ; Shin, Hyun-Song
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/130654
• Last update: 10.03.2025, 11:45 AM CET