Discussion of Alfred Wong and Jiayue Zhang’s paper

Yiping Huang

A chapter in The price, real and financial effects of exchange rates, 2018, vol. 96, pp 79-80 from Bank for International Settlements

Abstract: This is a good paper. By using empirical evidence and estimated model results, the paper solves, in a simple way, the mystery of the violation of covered interest parity (CIP) in international finance. It suggests that the long-standing covered interest parity puzzle does not take into account country risk (in the paper, this is part of the counterparty risk premium) and liquidity risk, both of which have become prominent in the period since the global financial crisis. By calculating the risk-adjusted covered interest parity, the paper shows that the cross-currency basis swap (CCBS) market functions well: deviations from this version of CIP are small, indicating that there is little scope for arbitrage.

Date: 2018
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