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The Covered Interest Parity Puzzle and the Evolution of the Japan Premium

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  • Alexis Stenfors

Abstract

A disturbance or breakdown of the first stage of the monetary transmission mechanism tends to be synonymous with high and volatile money market risk premia. Such market indicators include violations of the covered interest parity (CIP). This was not only evident during the financial crisis of 2007–08, but already during the Japanese banking crisis in the late 1990s, when it became referred to as the “Japan Premium.” Despite extraordinary policy measures by central banks in recent years, however, deviations from the CIP indicate continuing or even elevated stress in the international monetary system. This paper examines a string of distinct, but closely interconnected, assumptions and perceptions regarding CIP arbitrage. By doing so, it not only sheds some fresh light on the recent “CIP puzzle” but also on the era of the Japan Premium during the 1990s and its aftermath.

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  • Alexis Stenfors, 2019. "The Covered Interest Parity Puzzle and the Evolution of the Japan Premium," Journal of Economic Issues, Taylor & Francis Journals, vol. 53(2), pages 417-424, April.
    • Handle: RePEc:mes:jeciss:v:53:y:2019:i:2:p:417-424
    DOI: 10.1080/00213624.2019.1594527
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    1. Peek, Joe & Rosengren, Eric S., 2001. "Determinants of the Japan premium: actions speak louder than words," Journal of International Economics, Elsevier, vol. 53(2), pages 283-305, April.
    2. Stenfors, Alexis, 2018. "Bid-ask spread determination in the FX swap market: Competition, collusion or a convention?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 54(C), pages 78-97.
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    Cited by:

    1. Lilian Muchimba & Alexis Stenfors, 2021. "Beyond LIBOR: Money Markets and the Illusion of Representativeness," Journal of Economic Issues, Taylor & Francis Journals, vol. 55(2), pages 565-573, April.
    2. Alexis Stenfors & Lilian Muchimba, 2023. "The Transmission Mechanism of Stress in the International Banking System," Working Papers in Economics & Finance 2023-03, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    3. Chatziantoniou, Ioannis & Gabauer, David & Stenfors, Alexis, 2020. "From CIP-deviations to a market for risk premia: A dynamic investigation of cross-currency basis swaps," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).

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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F3 - International Economics - - International Finance
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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