Research
Publications
2024
- RAPSShorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate DeterminationNadav Ben Zeev, and Daniel Nathan2024Review of Asset Pricing Studies
This paper investigates the influence of global equity market shocks on institutional investors’ (IIs’) hedging behavior and the resulting effects on exchange rates. Employing unique daily data on Israeli IIs’ foreign exchange (FX) forward flows, we find that a one standard deviation global equity market shock generates significant and persistent selling of US dollar forwards by IIs, as a hedge against heightened FX exposure, along with significant and persistent exchange rate appreciation. To reinforce the causal interpretation of our findings, we use both a granular instrumental variable estimation approach as well as a Bartik instrument one to show that IIs’ hedging demand shocks induce significant exchange rate appreciation.
@article{ben2024shorting, title = {Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination}, author = {Ben Zeev, Nadav and Nathan, Daniel}, year = {2024}, dimensions = {true}, note = {Review of Asset Pricing Studies}, } - JIEThe Widening of Cross-Currency Basis: When Increased FX Swap Demand Meets a Shortage of Global Arbitrage CapitalDaniel Nathan, and Nadav Ben Zeev2024Journal of International Economics
This paper examines customer demand-side factors that affect deviation from covered interest rate parity (CIP) with respect to the dollar (i.e., cross-currency basis), particularly when arbitrageurs are constrained. Using novel detailed daily transaction-level data on the universe of Israeli institutional investors (IIs), we employ a granular instrumental variable (GIV) estimation to investigate how IIs’ FX swap demand affects CIP deviation. Our findings demonstrate that a one standard deviation shock to IIs’ FX swap demand when capital is abundant has a null effect on IIs’ basis. However, when capital is scarce, the demand shock produces significant and persistent reduction of 3.9-8.4 basis points in IIs’ basis, remaining significant for over 500 trading days.Our results, which are unchanged when we consider the complementary and popularized Bartik instrument approach instead of the GIV one, showcase how limits of arbitrage, together with demand shocks from a large customer base, can drive CIP deviations.
@article{nathan2022persistent, title = {The Widening of Cross-Currency Basis: When Increased FX Swap Demand Meets a Shortage of Global Arbitrage Capital}, author = {Nathan, Daniel and Ben Zeev, Nadav}, dimensions = {true}, year = {2024}, note = {Journal of International Economics} } - Lead Article, JBFMutual Fund Flows and Government Bond ReturnsMenachem Meni Abudy, Daniel Nathan, and Avi Wohl2024Journal of Banking and Finance
We investigate daily flows to Israeli government bonds mutual funds, which are held primarily by retail investors. We divide the bonds into six categories: nominal/CPI-linked; short-term, intermediate-term, and long-term maturity. We find that daily net flows are contemporaneously correlated with price changes of all categories. These price changes are economically significant and they subsequently reverse fully or mostly within 10 trading days. The price reversal indicates that the initial price changes are due to “noise.” We also find that these price distortions affect break-even inflation—a popular measure of inflation expectations. Our findings indicate that even securities that are held by institutions and professional investors are affected by retail sentiment.
@article{abudy2021mutual, title = {Mutual Fund Flows and Government Bond Returns}, author = {Abudy, Menachem Meni and Nathan, Daniel and Wohl, Avi}, year = {2024}, url = {http://www.sciencedirect.com/science/article/pii/S0378426624000396}, note = {Journal of Banking and Finance} }
Working Papers
2024
- SSRNChina WallsTomy Lee, Daniel Nathan, and Wang Chaojun2024
Conflicts of interest are inherent to banking conglomerates. Regulators increasingly manage these conflicts by enforcing China Walls-internal information barriers around key affiliates, in particular, dealers. We map the information sharing among the dealers and funds using the universe of foreign exchange transactions involving the Israeli Shekel to evaluate if today’s China Walls are effectively enforced. We employ a difference-in-differences design comparing affiliates to entirely unconnected firms around exceptionally large trades to measure information sharing, and exploit the structure of this market to verify our design. We document islands of informational autarky between the affiliate dealers and funds surrounded by a sea of information sharing: (1) The affiliate dealers and funds never trade and do not share information with each other. (2) The dealers and funds connected via trading relationships systemically share information, including on days when the dealer and the fund happen to not trade with each other. (3) Affiliate funds without China Walls intensely share information among themselves. (4) Our results hold during crisis and noncrisis periods, and across granular cells of firm and asset characteristics. Our results reveal remarkable regulatory capacity to control information flows between wholly aligned firms.
@article{chinawalls, title = {China Walls}, author = {Lee, Tomy and Nathan, Daniel and Chaojun, Wang}, dimensions = {true}, year = {2024} }
2023
- SSRNThe Perfect Storm: Bank of Israel’s Forex Interventions, Global Banks’ Limited Risk-Bearing Capacity, Deviations from Covered Interest Parity, and the Impact on the USD/ILS Options MarketMarkus Hertrich, and Daniel Nathan2023Revise and Resubmit at the Journal of Money, Credit and Banking
Using confidential daily foreign exchange interventions (FXI) data, we analyse the FXI episode of the Bank of Israel (BOI) from 2013 to 2019. We find that a purchase of US dollar (USD) 1 billion is on average associated with a depreciation of the Israeli new shekel (ILS) by 0.82%-0.83%, which is at the upper bound of the estimated impact in other studies. We show that this effectiveness can be explained by global financial intermediaries’ limited risk-taking capacity. The (indirect) effect on the forward rate is smaller-the BOI’s USD purchases have widened the negative deviation from covered interest parity. This widening remains significant over 90 days. Contrary to the findings in earlier empirical literature, the higher moments of the risk-neutral probability distribution of future spot exchange rates are also affected. The USD purchases shift the whole distribution towards higher USD/ILS values while reducing crash risk. We also find that the USD/ILS options market partially anticipates intervention episodes and prices them in before they occur.
@article{hertrich2023perfect, title = {The Perfect Storm: Bank of Israel’s Forex Interventions, Global Banks’ Limited Risk-Bearing Capacity, Deviations from Covered Interest Parity, and the Impact on the USD/ILS Options Market}, author = {Hertrich, Markus and Nathan, Daniel}, year = {2023}, dimensions = {true}, note = {Revise and Resubmit at the Journal of Money, Credit and Banking}, }
2018
- SSRNDecomposing the Term Structure of Interests Rates: Evidence from a Small Open EconomyDaniel Nathan2018Revise and Resubmit at the International Journal of Central Banking
This paper uses Israeli data of inflation-indexed and nominal government bonds to estimate a discrete-time essentially affine term structure model. To estimate the model, I use a uniquely long-spanned sample of monthly real yields for the period of 01/1985-03/2018. The nominal yields data spans the period of 05/2001-03/2018. I document an unconditional upward sloping real term structure that the model ascribes to a rising real term premium while the average expected real short rates are relatively flat. A decomposition of the break-even inflation shows that the unconditional term structure of the inflation premium is increasing with maturity and most of the variance in the short end is due to expected inflation. However, in the long end, most of it is due to the inflation term premium.
@article{nathan2018decomposing, title = {Decomposing the Term Structure of Interests Rates: Evidence from a Small Open Economy}, author = {Nathan, Daniel}, dimensions = {true}, year = {2018}, note = {Revise and Resubmit at the International Journal of Central Banking} }