The term structure of CIP violations

Patrick Augustin, Mikhail Chernov, Lukas Schmid and Dongho Song

No 14774, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We quantify the impact of risk-based and non-risk-based intermediary constraints (IC) on the term structure of CIP violations. Using a stochastic discount factor (SDF) inferred from interest rate swaps, we value currency derivatives. The wedge between model-implied and observed derivative prices reflects the impact of non-risk-based IC because our SDF incorporates risk-based IC. There is no wedge at short horizons, while the wedge accounts for 30% of long-term CIP violations. Consistent with IC theory, the wedge correlates with the shadow cost of intermediary capital, and the SDF-implied interest rate is a weighted average of collateralized and uncollateralized interest rates.

JEL-codes: C1 E43 E44 G12 H60 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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