Finance Seminar（2024 - 02）
Topic: Dividend Flows and the Foreign Exchange Rate
Speaker: Jingtao Zheng, University of Chicago
Time: Wednesday, January 10, 10:00-11:30 a.m. Beijing time
Location: Room 217, Guanghua Building 2
Abstract
A simple dividend-based currency strategy, which shorts a currency on the date its country's recent aggregate dividend payment by listed companies is large, exhibits a significant Sharpe ratio and alpha not explained by standard factors in the currency market. To understand this anomaly, I identify the significant price impact of predetermined dividend payments on exchange rates around payment dates. I propose a dividend repatriation channel where benchmark investors (ETFs and mutual funds) predictably repatriate a certain proportion of dividends received in local currency. I build a model in which heterogeneous financial intermediaries with limited risk-bearing capacity accommodate benchmark investors' currency demands stemming from dividend repatriation flows. In line with the model's implications, I find that the price impact of dividend flows on FX around the payment date is large when the intermediary capital ratio is low, CIP deviations are large, and FX implied volatilities are high.
My findings have implications for currency-market elasticity, capital regulations, and FX regimes.
Bio
Jingtao Zheng is Chicago Booth MBA and Financial Economics PhD (joint program by Chicago Booth and Department of Economics). Previously, Mr. Zheng worked in the hedge fund industry at Millennium Management on global macro strategy. He was deeply involved in the team’s spin-off from Millennium and the launch of Modular Asset Management in 2020 with US$1B, which was one of the largest in Asia macro space. His academic research covers international finance, asset pricing, merger arbitrage, commercial real estate, and FinTech. Mr. Zheng received his bachelor’s degree from Tsinghua University, with double majors in Automation and Economics.
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