Deviations from Covered Interest Rate Parity
Author(s)
Du, Wenxin
Tepper, Alexander
Verdelhan, Adrien Frederic
Date Issued
May 2018
Journal
The Journal of Finance
Publisher
Wiley
Citation
Du, Wenxin et al. “Deviations from Covered Interest Rate Parity.” The Journal of Finance 73, no. 3 (May 24, 2018): 915–957. © 2018 the American Finance Association
Version
Original manuscript
Abstract
We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed income spreads and with nominal interest rates.
MIT Department
Sloan School of Management
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1111/JOFI.12620
