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"Swap" Covered Interest Parity in Long-Date Capital Markets

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  • Fletcher, Donna J
  • Taylor, Larry W
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    Abstract

    Using the currency swap as the forward-exchange risk hedge, the covered interest parity condition in the long-date capital markets is evaluated. Of interest is the extent to which deviations from parity can be attributed to transactions costs. The empirical conclusions presented in the paper suggest that, although (on average) transactions costs account for deviations from parity, net deviations (in excess of transactions costs) are neither rare nor short-lived. Yet an analysis of the variance structure of covered interest parity reveals that these profit opportunities diminish over time and eventually disappear. Copyright 1996 by MIT Press.

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    Bibliographic Info

    Article provided by MIT Press in its journal Review of Economics & Statistics.

    Volume (Year): 78 (1996)
    Issue (Month): 3 (August)
    Pages: 530-38

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    Handle: RePEc:tpr:restat:v:78:y:1996:i:3:p:530-38

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    Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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    Cited by:
    1. J.M. Berk & K.H.W. Knot, 1999. "Co-Movements in Long-Term Interest Rates and the Role of PPP-BasedExchange Rate Expectations," DNB Staff Reports (discontinued), Netherlands Central Bank 37, Netherlands Central Bank.
    2. Jen-Chi Cheng & Larry Taylor & Wenlong Weng, 2010. "The links between international parity conditions and Granger causality: a study of exchange rates and prices," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 42(27), pages 3491-3501.
    3. Du, Wenxin & Schreger, Jesse, 2013. "Local Currency Sovereign Risk," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1094, Board of Governors of the Federal Reserve System (U.S.).
    4. Akram, Qaisar Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the Foreign Exchange Market: Turning on the Microscope," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6878, C.E.P.R. Discussion Papers.
    5. Berk, Jan Marc & Knot, Klaas H. W., 2001. "Testing for long horizon UIP using PPP-based exchange rate expectations," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(2), pages 377-391, February.
    6. Benjamin H Cohen, 2005. "Currency choice in international bond issuance," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, June.
    7. Rosita P. Chang & Sang-Hyop Lee & Sean F. Reid & S. Ghon Rhee, 2002. "One-Way Arbitrage-Based Interest Parity," Tinbergen Institute Discussion Papers, Tinbergen Institute 02-115/2, Tinbergen Institute.
    8. McBrady, Matthew R. & Schill, Michael J., 2007. "Foreign currency-denominated borrowing in the absence of operating incentives," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(1), pages 145-177, October.
    9. Baba, Naohiko & Sakurai, Yuji, 2011. "When and how US dollar shortages evolved into the full crisis? Evidence from the cross-currency swap market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(6), pages 1450-1463, June.
    10. repec:dgr:uvatin:2002115 is not listed on IDEAS
    11. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.

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