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Covered Interest Arbitrage: Then versus Now

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  • TED JUHL
  • WILLIAM MILES
  • MARC D. WEIDENMIER

Abstract

We introduce a new weekly database of spot and forward US-UK exchange rates and interest rates to examine the integration of forward exchange markets during the classical Gold Standard period (1880-1914). Using threshold autoregressions (TARs), we estimate the transaction cost band of covered interest differentials (CIDs) and compare our results with studies of more recent periods. We find that CIDs for the US-UK rate were generally largest during the classical Gold Standard. We argue that slower information and communications technology during the Gold Standard period led to fewer short-term financial flows, higher transaction costs and larger CIDs. Copyright (c) The London School of Economics and Political Science 2006.

Suggested Citation

  • Ted Juhl & William Miles & Marc D. Weidenmier, 2006. "Covered Interest Arbitrage: Then versus Now," Economica, London School of Economics and Political Science, vol. 73(290), pages 341-352, May.
  • Handle: RePEc:bla:econom:v:73:y:2006:i:290:p:341-352
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    References listed on IDEAS

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    1. Maurice Obstfeld & Alan M. Taylor, 2003. "Globalization and Capital Markets," NBER Chapters,in: Globalization in Historical Perspective, pages 121-188 National Bureau of Economic Research, Inc.
    2. Gauri Prakash & Alan M. Taylor, 1997. "Measuring Market Integration: A Model of Arbitrage with an Econometric Application to the Gold Standard, 1879-1913," NBER Working Papers 6073, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Perlin, Marcelo & Dufour, Alfonso & Brooks, Chris, 2010. "The Drivers of Cross Market Arbitrage Opportunities: Theory and Evidence for the European Bond Market," MPRA Paper 23381, University Library of Munich, Germany.
    2. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
    3. Ames, Matthew & Bagnarosa, Guillaume & Peters, Gareth W., 2017. "Violations of uncovered interest rate parity and international exchange rate dependences," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 162-187.
    4. Hanes, Christopher & Rhode, Paul W., 2013. "Harvests and Financial Crises in Gold Standard America," The Journal of Economic History, Cambridge University Press, vol. 73(01), pages 201-246, March.
    5. Marcelo Perlin & Alfonso Dufour & Chris Brooks, 2014. "The determinants of a cross market arbitrage opportunity: theory and evidence for the European bond market," Annals of Finance, Springer, vol. 10(3), pages 457-480, August.
    6. Matthew Ames & Gareth W. Peters & Guillaume Bagnarosa & Ioannis Kosmidis, 2014. "Upside and Downside Risk Exposures of Currency Carry Trades via Tail Dependence," Papers 1406.4322, arXiv.org.

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