Abstract:
The extent to which deviations from covered interest parity can be attributed to transactions costs has been exa ggerated in the economic literature because the swap market in foreig n exchange has been ignored. It is shown that such deviations should be no greater than the lowest of the transactions costs in one of thr ee markets: the swap market or either of the two relevant securities markets. This reconciles the theory with the data, which show spreads of no more than a few basis points. However, the empirical results h ave no direct bearing on the conventional market efficiency hypothesi s. Copyright 1988 by University of Chicago Press.
Journal of Political Economy is edited by Steven D. Levitt, MONIKA PIAZZESI, CANICE PRENDERGAST and ROBERT SHIMER
More articles in Journal of Political Economy from University of Chicago Press Address: The University of Chicago Press, Journals Division, P.O. Box 37005 Chicago, IL 60637 Series data maintained by Christopher F. Baum ().
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