Related papers: A central bank strategy for defending a currency p…
The notion that an independent central bank reduces a country's inflation is a controversial hypothesis. To date, it has not been possible to satisfactorily answer this question because the complex macroeconomic structure that gives rise to…
The adoption of a "makeup" strategy is one of the proposals in the ongoing review of the Fed's monetary policy framework. Another suggestion, to avoid the zero lower bound, is a more active role for fiscal policy. We put together these…
In this note we discuss - in what is intended to be a pedagogical fashion - FX option pricing in target zones with attainable boundaries. The boundaries must be reflecting. The no-arbitrage requirement implies that the differential (foreign…
The paper discusses the role of monetary policy when potential output depends on the inflation rate. If the intention of the central bank is to maximize actual output growth, then it has to be credibly committed to a strict inflation…
It is well known that traded foreign exchange forwards and cross currency swaps (CCS) cannot be priced applying overnight cash and carry arguments as they imply absence of funding advantage of one currency to the other. This paper proposes…
Currency carry trade is the investment strategy that involves selling low interest rate currencies in order to purchase higher interest rate currencies, thus profiting from the interest rate differentials. This is a well known financial…
Over-the-counter derivatives have contributed significantly to the effectiveness and efficiency of the international financial system but also entail significant counterparty credit risk. Collateralization is one of the most important and…
We study permissionless spot--perpetual basis trading in decentralized finance as a collateral control problem. The strategy holds spot inventory, hedges directional exposure with a short perpetual, and allocates capital between spot…
Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other dealers in the open…
We develop a cross-border market model for two countries based on a continuous trading mechanism, in which the transmission capacities that enable transactions between market participants from different countries are limited. Our market…
We consider a controlled double-ended queue consisting of two classes of customers, labeled sellers and buyers. The sellers and buyers arrive in a trading market according to two independent renewal processes. Whenever there is a seller and…
The currency carry trade is the investment strategy that involves selling low interest rate currencies in order to purchase higher interest rate currencies, thus profiting from the interest rate differentials. This is a well known financial…
We prove the existence of a continuous-time Radner equilibrium with multiple agents and transaction costs. The agents are incentivized to trade towards a targeted number of shares throughout the trading period and seek to maximize their…
We suggest an intermediate currency approach that allows us to price options on all FX markets simultaneously under the same risk-neutral measure which ensures consistency of FX option prices across all markets. In particular, it is…
This paper is concerned with a pairs trading rule. The idea is to monitor two historically correlated securities. When divergence is underway, i.e., one stock moves up while the other moves down, a pairs trade is entered which consists of a…
We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the…
A modern version of Monetary Circuit Theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central…
The paper addresses the problem of meta order execution from a broker-dealer's point of view in Almgren-Chriss model under execution risk. A broker-dealer agency is authorized to execute an order of trading on some client's behalf. The…
We characterize optimal monetary policy when policy endogenously moves risk premia through redistribution across agents who differ in their willingness to bear risk. The analytical core is Marginal Risk Capacity, the covariance of monetary…
Price-mediated contagion occurs when a positive feedback loop develops following a drop in asset prices which forces banks and other financial institutions to sell their holdings. Prior studies of such events fix the level of market…