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A Model of Covered Interest Arbitrage under Market Segmentation

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  • Blenman, Lloyd P
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    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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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 23 (1991)
    Issue (Month): 4 (November)
    Pages: 706-17

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    Handle: RePEc:mcb:jmoncb:v:23:y:1991:i:4:p:706-17

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Luca Agnello & Vítor Castro & Ricardo M. Sousa, 2011. "How Does Fiscal Policy React to Wealth Composition and Asset Prices?," NIPE Working Papers 24/2011, NIPE - Universidade do Minho.
    2. 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.
    3. Sergio L. Schmukler & Luis Serven, 2002. "Pricing Currency Risk: Facts and Puzzles from Currency Boards," NBER Working Papers 9047, National Bureau of Economic Research, Inc.
    4. 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.

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