Segmented Dollar Funding
Abstract
Deviations from covered interest rate parity (CIP) are often linked to limits to arbitrage, yet trading volumes surge during periods of apparent no-arbitrage violations. We show that these distortions stem from constraints on non-U.S. agents’ access to wholesale U.S. dollar markets and reflect a premium for unencumbered synthetic dollar funding: non-U.S. banks substitute secured USD borrowing with FX swaps to meet regulatory requirements. A shadow cost-augmented CIP condition holds, implying no riskless arbitrage. U.S. dealers extract rents on dollar provision while non-U.S. customers bear $10.4 billion in additional annual hedging costs. Our results illustrate how intermediary constraints segment global dollar funding.
Fields of Study & Subjects
Art History and Market Analysis
Economic Theory and Institutions
Historical Economic and Social Studies
Publication details
- Journal / source
- Journal of Financial Economics
- Publisher
- Elsevier BV
- Volume
- 184
- Pages
- 104348–104348
- Publication date
- 12 August 2026
- Language
- EN