Covered Interest Rate Parity Deviations, COVID-19 Pandemic Infection Cases, and Vaccination
37 Pages Posted: 15 Sep 2022
Abstract
This study explores the impact of the COVID-19 pandemic on the deviations from the covered interest rate parity (CIP) for G10 currencies. We find that more COVID-19 infection cases or higher stringency index are associated with larger CIP deviations. However, this relation disappears after the availability of COVID-19 vaccines, indicating that vaccines not only battle against coronavirus but also help promote efficiency in the FX market. Furthermore, we find that the rise of U.S. dollar value during the COVID-19 pandemic contributes to the persistent deviation from the CIP.
Keywords: Covered interest rate parity (CIP), COVID-19 pandemic, Stringency index, Cross-currency basis.
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