Interconnected Deviations from Covered Interest Parity

23 Pages Posted: 3 Nov 2020

See all articles by Daniel Felix Ahelegbey

Daniel Felix Ahelegbey

University of Pavia, Department of Economics and Management

Oyakhilome Wallace Ibhagui

Baum Tenpers Research Institute

Date Written: September 15, 2020

Abstract

We investigate the dynamic interconnectedness among the major world cross-currency basis swap spreads during tranquil and turbulent times. We examine whether movements in the bases are merely anecdotal or provide evidence of contagion, the most central basis for spillover propagation, and implications for market participants. The result shows a high degree of interconnectedness among the bases in crisis periods with mark-to-market losses for existing exposures and large arbitrage opportunities for investors seeking new positions. We find evidence that spillovers in the bases propagate from the Euro, the Swiss franc, and the Danish krone to other bases.

Keywords: Covered Interest Parity, Cross-currency Basis, Currency Swaps, Dollar Funding, Financial Crisis, Interconnectedness, VAR Model.

JEL Classification: C11, C32, F31, G01, G15

Suggested Citation

Ahelegbey, Daniel Felix and Ibhagui, Oyakhilome Wallace, Interconnected Deviations from Covered Interest Parity (September 15, 2020). Available at SSRN: https://ssrn.com/abstract=3693013 or http://dx.doi.org/10.2139/ssrn.3693013

Daniel Felix Ahelegbey

University of Pavia, Department of Economics and Management ( email )

Via San Felice 7
Pavia, Lombardia 27100
Italy
+393888931128 (Phone)

HOME PAGE: http://sites.google.com/site/danielfelixahey/home

Oyakhilome Wallace Ibhagui (Contact Author)

Baum Tenpers Research Institute ( email )

Akoka, 23401, Lagos, Nigeria
Lagos, 23401
Nigeria

HOME PAGE: http://sites.google.com/view/oyakhilomewibhagui

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