Empirical Investigation of Covered Interest Rate Parity in Developed and Emerging Markets

54 Pages Posted: 2 Jul 2012

See all articles by Emrah Sener

Emrah Sener

Ozyegin University

Sait Satiroglu

Center For Computational Finance

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: June 29, 2012

Abstract

We use deviations in the covered interest rate parity (CIRP) condition to examine violations of the law of one price (LOP). We use the time periods around the recent financial crisis to examine the dynamics of CIRP violations. We find that, for both developed and emerging economies, LOP tends to hold during normal economic times but that it is severely violated during periods of financial distress. In addition, we examine the determinants of CIRP deviations. Our results indicate that, in developed economies, CIRP deviations are primarily driven by global risk factors. In emerging economies, however, CIRP deviations are driven by both global and local risk factors.

Keywords: Interest Rate Parity, Swap Markets, Financial Constraints, Law of One Price

JEL Classification: G01, G12

Suggested Citation

Sener, Emrah and Satiroglu, Sait and Yildirim, Yildiray, Empirical Investigation of Covered Interest Rate Parity in Developed and Emerging Markets (June 29, 2012). Available at SSRN: https://ssrn.com/abstract=2096222 or http://dx.doi.org/10.2139/ssrn.2096222

Emrah Sener

Ozyegin University ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

Sait Satiroglu (Contact Author)

Center For Computational Finance ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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