tag:blogger.com,1999:blog-582368152716771238.post3468079991757907004..comments2024-03-29T07:18:14.271-05:00Comments on The Grumpy Economist: More covered interest parityJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-582368152716771238.post-5965788604872602022020-01-28T11:27:49.669-06:002020-01-28T11:27:49.669-06:00https://papers.ssrn.com/sol3/papers.cfm?abstract_i...https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3513427Rates Strategist, Risk Modellerhttps://www.blogger.com/profile/00426721584613968366noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87917284080730198622018-03-21T01:58:50.027-05:002018-03-21T01:58:50.027-05:00Hey John, Thanks for the post. The recent paper by...Hey John, Thanks for the post. The recent paper by Jiang Krishnamurthy and Lustig talks about the fact that treasury basis has always been negative, even before the financial crises (Unlike LIBOR basis). They claim that this reflects convenience yield (cy) on USD treasury for foreign investors. What are your views on that paper? In particular, cy-view does not explain why at least some subset of agents who do not have any cy from USD (safety and liquidity) exploit the mispricing out there? Also, cy-view predicts that basis shoudl widen during tough times. I don't see the evidence for that in a systematic way. (at least for the countries I follow)<br /><br />Thanksapoorvahttps://www.blogger.com/profile/14474882552655021079noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56772157913858893372017-03-31T09:52:06.836-05:002017-03-31T09:52:06.836-05:00John - my favourite paper on this topic:
http://sc...John - my favourite paper on this topic:<br />http://scholar.harvard.edu/files/gliao/files/creditcip.pdf<br /><br />It has very detailed analysis of the hedging behaviour of firms and why real economy end users are willing to pay the basis. As you say say, shadow costs such as regulatory equity capital (and target returns thereon) and credit rating assessment models ensure that the subset of agents who can lever also cannot provide the basis hedge to the real economy at zero.<br /><br />What are the social costs?<br />Basis is a form of taxation on cross-border risk-sharing (credit risk transfer between currencies is taxed by the quite wide basis spread) and the corresponding deadweight losses therein.<br />Perhaps it also diverts financial analysis resources away from socially useful assessment of real economy credit investment towards less obviously useful analysis of the interaction of incentives and unforeseen consequences created by arbitrary regulation.Hermitianhttps://www.blogger.com/profile/12051671494018127564noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69229202512051951272017-03-30T13:46:11.833-05:002017-03-30T13:46:11.833-05:00The passage quoted by Duffie doesn't mention t...The passage quoted by Duffie doesn't mention the risk-weighting system, but it surely affects the profitability of this supposed arbitrage trade. Given the risk-weights, it might not be an efficient use of regulatory capital. If the regulators read your blog, maybe they'll move the weights around to provide better accommodation for this trade.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.com