TY - JOUR
T1 - Covered interest rate parity deviations in the Asia-Pacific
AU - Bilson, Christopeher M
AU - Brailsford, Timothy J.
AU - Rajaguru, Gulasekaran
PY - 2022/3
Y1 - 2022/3
N2 - Recent evidence has documented a failure in the covered interest rate parity (CIP) condition post Global Financial Crisis (post-GFC). Using a model which incorporates the transaction costs embedded in the bid-ask spread, we find evidence that while raw deviations from this relation have increased, market makers spreads have also widened, resulting in a decreasing trend in both the magnitude and duration of CIP deviations after adjusting for transaction costs. This finding, however, is highly market specific and varies considerably between developed and emerging market countries. These conclusions are robust to the post-GFC period and trading strategies designed to exploit these deviations were found to generally perform poorly.
AB - Recent evidence has documented a failure in the covered interest rate parity (CIP) condition post Global Financial Crisis (post-GFC). Using a model which incorporates the transaction costs embedded in the bid-ask spread, we find evidence that while raw deviations from this relation have increased, market makers spreads have also widened, resulting in a decreasing trend in both the magnitude and duration of CIP deviations after adjusting for transaction costs. This finding, however, is highly market specific and varies considerably between developed and emerging market countries. These conclusions are robust to the post-GFC period and trading strategies designed to exploit these deviations were found to generally perform poorly.
U2 - 10.1016/j.intfin.2022.101524
DO - 10.1016/j.intfin.2022.101524
M3 - Article
SN - 1042-4431
VL - 77
JO - Journal of International Financial Markets, Institutions and Money
JF - Journal of International Financial Markets, Institutions and Money
M1 - 101524
ER -