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Does swap-covered interest parity hold in long-term capital markets after the financial crisis?

Author

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  • Takahiro Hattori

    (Policy Research Institute, Ministry of Finance)

Abstract

This paper analyzes swap-covered interest parity by comparing US Treasury bonds with USD denominated foreign assets replicated using cross-currency basis swaps. We find that the deviations of these yield spreads declined substantially after the financial crisis, which is in sharp contrast with the variation in the cross-currency basis. The analysis in this paper also shows the existence of cointegrating relationships between the cross-currency basis and domestic/foreign swap spreads, and conclude that the US swap spread tightening is related to the negative currency basis.

Suggested Citation

  • Takahiro Hattori, 2017. "Does swap-covered interest parity hold in long-term capital markets after the financial crisis?," Discussion papers ron293, Policy Research Institute, Ministry of Finance Japan.
    • Handle: RePEc:mof:wpaper:ron293
    as

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    File URL: https://warp.ndl.go.jp/info:ndljp/pid/10319762/www.mof.go.jp/pri/research/discussion_paper/ron293.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Angrick, Stefan & Nemoto, Naoko, 2018. "Breaking Par: Short-Term Determinants of Yen-Dollar Swap Deviations," ADBI Working Papers 859, Asian Development Bank Institute.

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    More about this item

    Keywords

    Covered interest parity; Cross-currency basis swap; Cointegration; Swap spread; Term structure;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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