Deviations from covered interest rate parity and capital outflows: The case of Switzerland

Albi Tola, Miriam Koomen and Amalia Repele

No 2020-08, Working Papers from Swiss National Bank

Abstract: We investigate the relationship between deviations from the covered interest rate parity (CIP) and Swiss capital outflows since the great financial crisis. While the CIP held tightly before the crisis, it has been failing for most currencies vis-à-vis the US dollar ever since. We expect CIP deviations to adversely affect outflows, as they generally result in additional costs for Swiss investors. We find empirical support for our hypothesis. Our results show that with increasing CIP deviations, Swiss portfolio investment debt outflows decrease significantly. This decrease could have implications for the demand for domestic currency investments.

Keywords: Covered interest rate parity; cross-currency basis; dollar funding; capital flows; portfolio investments (search for similar items in EconPapers)
JEL-codes: F31 F32 G11 G15 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020
New Economics Papers: this item is included in nep-eec and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2020-08

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