The Covered Interest Parity Puzzle and the Evolution of the Japan Premium

Alexis Stenfors

No 2018-10, Working Papers in Economics & Finance from University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group

Abstract: A disturbance or breakdown of the first stage of the monetary transmission mechanism tends to be synonymous with high and volatile money market risk premia. Such market indicators include violations of the covered interest parity (CIP). This was not only evident during the financial crisis of 2007-08, but already during the Japanese banking crisis in the late 1990s, when it became referred to as the 'Japan Premium'. Despite extraordinary policy measures by central banks in recent years, however, deviations from the CIP indicate continuing or even elevated stress in the international monetary system. This paper examines a string of distinct, but closely interconnected, assumptions and perceptions regarding CIP arbitrage. By doing so, it not only sheds some fresh light on the recent 'CIP puzzle' but also on the era of the Japan Premium during the 1990s and its aftermath.

Keywords: arbitrage; covered interest parity; financial crisis; FX swap market; Japan Premium; money market (search for similar items in EconPapers)
JEL-codes: E4 E52 F3 F65 G15 (search for similar items in EconPapers)
Pages: 16
Date: 2018-11-21
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: The Covered Interest Parity Puzzle and the Evolution of the Japan Premium (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pbs:ecofin:2018-10

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