Economics Weekly Seminar: Soumya Datta
March 13 @ 1:30 pm - 2:40 pm
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Title: Limits of Arbitrage in Post-Crisis Forex Markets:
Revisiting Basel III Norms
Speaker: Soumya Datta, South Asian University
Wednesday, March 13, 1:30 – 2:40pm
AC 02 LR 105
Abstract: After the failure of Lehman Brothers in September 2008, increased counterparty risk and decline of interbank lending markets have limited the scope for short-term arbitrage in forex markets. Empirical studies demonstrate significant deviations from covered interest parity during the same period. We attempt to theoretically explain these observations using a model of forex markets with heterogeneous bounded rational agents. In a departure from existing literature, we show that limits of arbitrage might become more restrictive for larger deviations from fundamentals. In this situation, increased regulatory restrictions like Basel III norms, which were suggested as a policy response to the Global Financial Crisis, might be counterproductive.