This paper studies the violation of the most basic no-arbitrage condition in international finance — Covered Interest Parity (CIP). We find that the CIP puzzle largely stems from funding liquidity differences, reflected in the marginal funding rates of the main arbitrageurs. With severe...

This paper studies the violation of the most basic no-arbitrage condition in international finance - Covered Interest Parity (CIP). To understand the CIP conundrum, it is key to (i) account for funding frictions in U.S. dollar money markets, and (ii) to study the challenges of swap...

Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over...

Daily average foreign exchange market turnover reached $4 trillion in April 2010, 20% higher than in 2007. Growth owed largely to the increased trading activity of "other financial institutions", which contributed 85% of the higher turnover. Within this customer category, the growth is driven by...

Using ten years of FX transactions data we demonstrate that a large share of the FX forward discount bias can be accounted for by order flow. A simple microstructure-based decomposition suggests that order flow creates a timevarying risk premium that is correlated with the forward discount. The...