Journal of Financial Economics Vol. 184 2026
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.
- DOI
- 10.1016/j.jfineco.2026.104348
- Volume
- 184
- Pages
- 104348
- Language
- en
- Sources
- crossref openalex