Does the swap-covered interest parity still hold in long-term capital markets after the financial crisis? Evidence from cross-currency basis swaps

Takahiro Hattori

International Review of Economics & Finance, 2022, vol. 79, issue C, 224-240

Abstract: This paper analyzes the swap-covered interest parity condition by comparing US Treasury bonds with USD-denominated foreign assets replicated using cross-currency basis swaps. We find that the deviations of these yield spreads declined substantially after the financial crisis, suggesting that the swap-covered interest parity still holds. To reconcile our paradoxical findings with the previous literature that insists upon the failure of covered interest parity, we empirically confirm that the regulatory costs of cross-currency basis swaps are cancelled out by the costs of swaps spread under swap-covered interest parity.

Keywords: Swap-covered interest parity; Cross-currency basis swap; Swap spread; Term structure (search for similar items in EconPapers)
JEL-codes: E43 F31 G15 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:79:y:2022:i:c:p:224-240

DOI: 10.1016/j.iref.2021.10.008

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