Forex swap premiums, shock response and covered profits: an ARDL–EGARCH model analysis

Jianfeng Huang and Wencong Lu ()

Applied Economics Letters, 2019, vol. 26, issue 20, 1705-1708

Abstract: This article develops an autoregressive distributed lag-exponential GARCH (ARDL–EGARCH) model to explore the formation mechanism of covered profits from the perspectives of forex swap premiums and shock response, considering eight arbitrage strategies on four currency pairs as a case study. Two important conclusions emerge: first, the stronger the currency, the more the opportunity for lucrative unidirectional arbitrage; second, covered profits result from profit memory, the dynamic adjustment of market expectation from forex swap premiums and the asymmetric volatility clustering of shock response.

Date: 2019
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DOI: 10.1080/13504851.2019.1592102

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