Deviations from Covered Interest Rate Parity

Wenxin Du, Alexander Tepper and Adrien Verdelhan ()

No 23170, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2017-02
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (49)

Published as WENXIN DU & ALEXANDER TEPPER & ADRIEN VERDELHAN, 2018. "Deviations from Covered Interest Rate Parity," The Journal of Finance, vol 73(3), pages 915-957.

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