The U.S. dollar’s role in the context of the international monetary system has been studied extensively. This paper highlights a new channel through which dollar fluctuations can become a self-fulfilling pro-cyclical force. At the core of it, there is a fundamental asymmetry between the shrinking exposure of the “real” U.S.…

The authors investigate the feedback effect of option hedging activity on the stability of the price of the underlying. While previous literature has focused on the effect of hedging activity on the volatility of the underlying, this paper focuses on directional instabilities arising from feedback effects.