Credit Migration and Covered Interest Rate Parity

Gordon Liao

Working Paper from Harvard University OpenScholar

Abstract: I document economically large and persistent discrepancies in the pricing of credit risk between corporate bonds denominated in different currencies. This violation of the Law-of-One-Price (LOOP) in credit risk is closely aligned with violations of covered interest rate parity in the time series and the cross-section of currencies. I explain this phenomenon with a model of market segmentation. Post-crisis regulations and intermediary frictions have severely impaired arbitrage in the exchange rate and credit markets each on their own, but capital flows, either currency-hedged investment or debt issuance, bundle together the two LOOP violations. Limits of arbitrage spill over from one market to another.

Date: 2016-10
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Citations: View citations in EconPapers (24)

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http://scholar.harvard.edu/gliao/node/468601

Related works:
Journal Article: Credit migration and covered interest rate parity (2020)
Working Paper: Credit Migration and Covered Interest Rate Parity (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:qsh:wpaper:468601

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