Deviations from Covered Interest Rate Parity
By Wenxin Du, Alexander Tepper, A. Verdelhan. 2018
586 citations recorded by the source corpus.
We find that deviations from the covered interest rate parity condition (CIP) 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 the 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.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/997ff0fa0ecdd5749feba2cc711f9e4bed38c538
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Citations in the corpus
- International Currencies and Capital Allocation (2020, background): “The cross-currency basis, the direct cost of hedging, used to be small (zero) until the 2008 financial crisis and has been much larger ever since (Du et al. (2017)).”
- Exchange Rate Disconnect in General Equilibrium (2017, unknown): “14 Du, Tepper, and Verdelhan (2018) document that the average annualized CIP deviations were a negligible two basis points before 2007 and since then increased 10-fold to 20 basis points, yet this is still an order of magnitude smaller than the expected UIP deviations, which are around 200 basis…”
- Is Bitcoin Really Untethered? (2020, methodology): “In this section we examine the backing of Tether by borrowing from the intermediary asset pricing literature, specifically Du, Tepper, and Verdelhan (2018) and He and Krishnamurthy (2018), who argue that banks’ compliance with period-end capital requirements may have a sizable effect on asset…”
- When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response (2020, unknown): “For instance, Duffie (2020) argues that this is essentially what the Fed did in Treasury markets in March 2020 when it bought large quantities of Treasury bonds extremely quickly.”