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Dealer leverage and exchange rates: Heterogeneity across intermediaries

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  • Correa, Ricardo
  • DeMarco, Laurie

Abstract

We find that the leverage of primary dealers has predictive power in forecasting exchange rates, but that it varies by a novel type of heterogeneity, the dealer’s headquarter jurisdiction, and over time. The leverage of foreign-headquartered dealers in the U.S. drives the predictive power for exchange rates, while it is insignificant for U.S.-headquartered dealers. We propose this heterogeneity can be explained by the relative balance sheet capacity of foreign dealers compared to domestic dealers and how that capacity changes over time with regulation. Furthermore, we document that currency market positions are stronger than cross-border lending as the channel through which leverage affects exchange rates.

Suggested Citation

  • Correa, Ricardo & DeMarco, Laurie, 2025. "Dealer leverage and exchange rates: Heterogeneity across intermediaries," Journal of Banking & Finance, Elsevier, vol. 174(C).
    • Handle: RePEc:eee:jbfina:v:174:y:2025:i:c:s0378426625000214
    DOI: 10.1016/j.jbankfin.2025.107400
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    More about this item

    Keywords

    Exchange rates; Intermediaries; International finance; Leverage cycles; Primary dealers;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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