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Covered interest rate parity deviations in the Asia-Pacific

Chris Bilson, Tim Brailsford and Gulasekaran Rajaguru

Journal of International Financial Markets, Institutions and Money, 2022, vol. 77, issue C

Abstract: Recent evidence has documented a failure in the covered interest rate parity (CIP) condition post Global Financial Crisis (post-GFC). Using a model which incorporates the transaction costs embedded in the bid-ask spread, we find evidence that while raw deviations from this relation have increased, market makers spreads have also widened, resulting in a decreasing trend in both the magnitude and duration of CIP deviations after adjusting for transaction costs. This finding, however, is highly market specific and varies considerably between developed and emerging market countries. These conclusions are robust to the post-GFC period and trading strategies designed to exploit these deviations were found to generally perform poorly.

Keywords: Covered interest rate parity; Market efficiency; Arbitrage (search for similar items in EconPapers)
JEL-codes: F15 F31 G15 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:77:y:2022:i:c:s1042443122000178

DOI: 10.1016/j.intfin.2022.101524

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Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

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