Credit Migration and Covered Interest Rate Parity

Gordon Liao

No 1255, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper examines the connection between deviations in covered interest rate parity and differences in the credit spread of bonds of similar risk but different currency denomination. These two pricing anomalies are highly aligned in both the time series and the cross-section of currencies. The composite of these two pricing deviations ? the corporate basis ? represents the currency-hedged borrowing cost difference between currency regions and explains up to a third of the variation in the aggregate corporate debt issuance flow. I show that arbitrage aimed at exploiting one type of security anomaly can give rise to the other.

Keywords: Covered interest rate parity; Limits of arbitrage; Credit market segmentation; debt issuances; Dollar convenience yield; Foreign exchange rate hedge (search for similar items in EconPapers)
JEL-codes: E44 F3 F55 G12 G15 G23 G28 G32 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2019-08
New Economics Papers: this item is included in nep-mac, nep-opm and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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https://www.federalreserve.gov/econres/ifdp/files/ifdp1255.pdf (application/pdf)

Related works:
Journal Article: Credit migration and covered interest rate parity (2020)
Working Paper: Credit Migration and Covered Interest Rate Parity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1255

DOI: 10.17016/IFDP.2019.1255

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