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A Model of Covered Interest Arbitrage under Market Segmentation

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  • Blenman, Lloyd P

Abstract

Existing models of covered interest arbitrage typically assume market participants have equal capital and foreign exchange market access. This paper derives sufficient conditions for the existence of neutral interest parity forward price bands when capital markets are segmented and exchange rates are dually quoted. All forward price intervals are completely characterized in terms of simultaneous two-way and one-way arbitrage flow possibilities. The parameters of the no-arbitrage price region are shown to be established on the basis of relative advantage with respect to the set of available arbitrage strategies. Copyright 1991 by Ohio State University Press.

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  • Blenman, Lloyd P, 1991. "A Model of Covered Interest Arbitrage under Market Segmentation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 706-717, November.
    • Handle: RePEc:mcb:jmoncb:v:23:y:1991:i:4:p:706-17
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    Cited by:

    1. Castro, Vítor & Sousa, Ricardo M., 2012. "How do central banks react to wealth composition and asset prices?," Economic Modelling, Elsevier, vol. 29(3), pages 641-653.
    2. João M. Sousa & Ricardo M. Sousa, 2019. "Asset Returns Under Model Uncertainty: Evidence from the Euro Area, the US and the UK," Computational Economics, Springer;Society for Computational Economics, vol. 54(1), pages 139-176, June.
    3. Suh, Sangwon & Kim, Young Ju, 2016. "Covered interest parity and arbitrage paradox in emerging markets: Evidence from the Korean market," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 161-176.
    4. Costantini, Mauro & Sousa, Ricardo M., 2022. "What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality," Journal of International Money and Finance, Elsevier, vol. 122(C).
    5. Agnello, Luca & Castro, Vítor & Sousa, Ricardo M., 2012. "How does fiscal policy react to wealth composition and asset prices?," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 874-890.
    6. Blenman, Lloyd P., 2000. "Non-reversed trades: Further implications for currency trading," International Review of Economics & Finance, Elsevier, vol. 9(3), pages 243-255, July.
    7. Henock Louis & Lloyd P. Blenman & Janet S. Thatcher, 1999. "Interest Rate Parity And The Behavior Of The Bid-Ask Spread," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 189-206, June.
    8. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk : facts and puzzles from currency boards," Policy Research Working Paper Series 2815, The World Bank.
    9. Peter G. Szilagyi & Jonathan A. Batten, 2006. "Arbitrage, Covered Interest Parity and Long-Term Dependence between the US Dollar and the Yen," The Institute for International Integration Studies Discussion Paper Series iiisdp128, IIIS.
    10. Abankwa, Samuel & Blenman, Lloyd P., 2021. "Measuring liquidity risk effects on carry trades across currencies and regimes," Journal of Multinational Financial Management, Elsevier, vol. 60(C).
    11. Viet Do & Tram Vu, 2018. "The additional cost of hedging in foreign currency loans," Australian Journal of Management, Australian School of Business, vol. 43(2), pages 305-327, May.
    12. Batten, Jonathan A. & Szilagyi, Peter G., 2007. "Covered interest parity arbitrage and temporal long-term dependence between the US dollar and the Yen," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 376(C), pages 409-421.

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