Extracting shadow exchange rates and foreign exchange premia during currency crises: an example from Egypt

ABSTRACT

We utilize high-frequency data and a novel synchronous trade-matching algorithm to show that shadow exchange rates could be estimated from price spreads between depositary receipts and their underlying local stocks using an example of the recent Egyptian currency crisis. These shadow rates reflect the local black market foreign exchange rates in addition to a foreign exchange premium, which we attribute to the cost of expatriating capital during currency and capital control periods.

KEYWORDS:

• Arbitrage
• currency crisis
• depositary receipts (DRs)
• Egypt
• high-frequency data
• stock market

JEL CLASSIFICATION:

• F30
• G15

Acknowledgement

The authors would like to personally thank Karim Abadir, Diaa Nour ElDin and Mostafa Abdel Aziz for valuable comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In August 2015, an amendment to the central bank law was issued; it constituted trading currency in the black market as a criminal act, punishable by a prison term of up to 10 years.

² The local black market exchange rate did not facilitate profit repatriation for multinational institutions; they could not deposit or transfer large amounts of foreign currency in the banking system. Furthermore, accounting standards did not justify the purchase of USDs at a high price on the black market, hence FX losses would not be tax deductible.

³ Black market exchange rate data were obtained from an average of daily black market rates surveyed by news agencies like Reuters, Bloomberg and Enterprise (https://enterprise.press/).

⁴ For Egyptian company stock and DRs listed in London, variable fees on the stock comprise stock exchange fees and broker commission, which average approximately 60 basis points, whereas variable fees on the DR comprise stock exchange fees and broker commission, which average approximately 10 basis points. Other variable fees include Bank of New York Mellon conversion fees that average around USD 0.05 per share. Fixed fees include global settlement fees that amount to USD 260.