Are Intermediary Constraints Priced?

Abstract Violations of no-arbitrage conditions measure the shadow cost intermediary constraints. Intermediary asset pricing and intertemporal hedging together imply that risk these constraints tightening is priced. We describe a “forward CIP trading strategy” bets on violations shrinking show its returns help identify price this risk. This strategy yields highest for currency pairs associated with carry trade. The strategy’s substantially contributes to volatility stochastic discount factor, correlated both other near-arbitrages wealth measures, appears be consistently priced across various classes. Authors have furnished an Internet Appendix, which available Oxford University Press Web site next link final published paper online.