Deviations from Covered Interest Rate Parity

84 Pages Posted: 21 Feb 2017

See all articles by Wenxin Du

Wenxin Du

University of Chicago Booth School of Business

Alexande Tepper

Columbia University - Graduate School of Architecture, Planning and Preservation

Adrien Verdelhan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Date Written: February 2017

Abstract

We find that deviations from the covered interest rate parity condition (CIP) imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on the banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed-income spreads and with nominal interest rates.

Suggested Citation

Du, Wenxin and Tepper, Alexander and Verdelhan, Adrien, Deviations from Covered Interest Rate Parity (February 2017). NBER Working Paper No. w23170. Available at SSRN: https://ssrn.com/abstract=2920388

Wenxin Du (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/wenxindu/

Alexander Tepper

Columbia University - Graduate School of Architecture, Planning and Preservation ( email )

New York, NY
United States

Adrien Verdelhan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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