Regional Liquidity Risk and Covered Interest Parity during the Global Financial Crisis: Evidence from Tokyo, London, and New York

Shin-ichi Fukuda ()

No CIRJE-F-1017, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: During the global financial crisis, there were substantial deviations from covered interest parity (CIP) condition. In particular, in the post Lehman period, the US dollar interest rate became very low on the forward market. However, the deviations from the CIP condition varied across markets. After presenting a simple model, the following analysis examines how the CIP condition between the Japanese yen and the US dollar was violated in Tokyo, London, and New York markets. We show that the CIP deviations became largest in the New York market soon after the Lehman shock but were largest in the Tokyo market in the rest of the turmoil period. The regressions suggest that market-specific credit risks and central banks’ liquidity provisions explained the difference across the markets. In particular, they indicate that larger dollar-specific risk and smaller yen-specific risk caused larger deviations in the Tokyo market.

Pages: 32 pages
Date: 2016-06
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (6)

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Journal Article: Regional Liquidity Risk and Covered Interest Parity During the Global Financial Crisis: Evidence from Tokyo, London, and New York (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2016cf1017

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