Limits to arbitrage and the term structure of CIP violations

Paul Wohlfarth and Xiaohong Chen

Journal of International Financial Markets, Institutions and Money, 2024, vol. 95, issue C

Abstract: We investigate the existence of a term structure in cross-currency swap bases, a measure for CIP violations, to identify limits to arbitrage in foreign exchange swap markets. Based on estimates from a multivariate model of USD cross-currency bases for G10 currencies that caters for a number of known intermediary constraints as well as linkages between currency pairs our findings highlight the importance of two-tiered arbitrage, risk aversion, regulation, and policy in explaining this term structure of CIP violations.

Keywords: Preferred habitat; Foreign exchange markets; International finance; Covered interest parity (search for similar items in EconPapers)
JEL-codes: E4 E5 F3 G1 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:95:y:2024:i:c:s1042443124000970

DOI: 10.1016/j.intfin.2024.102031

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