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Strong sterling pound and weak European currencies in the crises: Evidence from covered interest parity of secured rates

Listed author(s):
  • Fukuda, Shin-ichi
Registered author(s):

    In the post Lehman period, the interest rate of the US dollar became low on the forward contract because of“flight to quality” to the international currency. However, in the Euro crisis, that of the Sterling pound became equally low, while the other European currencies such as the Danish kroner increased its their interest rate. By using secured rates, the following analysis examines why the Sterling pound and the Danish kroner showed asymmetric features in deviations from the covered interest parity (CIP) condition. The regression results suggest that there was a structural break in the determinants of the deviations across the European currencies in the two crises. Currency-specific money market risk was critical in explaining the deviations in the global financial crisis (GFC), while EU bank credit risk and global market risk were useful in explaining the deviations in the Euro crisis. In particular, EU bank credit risk and global market risk had asymmetric effect on the deviations. The asymmetry explains contrasted features between the Sterling pound and the Danish kroner.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0889158316300302
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    Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

    Volume (Year): 42 (2016)
    Issue (Month): C ()
    Pages: 109-122

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    Handle: RePEc:eee:jjieco:v:42:y:2016:i:c:p:109-122
    DOI: 10.1016/j.jjie.2016.10.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622903

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    1. Niall Coffey & Warren B. Hrung & Asani Sarkar, 2009. "Capital constraints, counterparty risk, and deviations from covered interest rate parity," Staff Reports 393, Federal Reserve Bank of New York.
    2. John B. Taylor & John C. Williams, 2009. "A black swan in the money market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    3. Shin-ichi Fukuda & Mariko Tanaka, 2016. "Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from Australian Dollar and the NZ Dollar," CARF F-Series CARF-F-401, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Tommaso Mancini Griffoli & Angelo Ranaldo, 2010. "Limits to arbitrage during the crisis: funding liquidity constraints and covered interest parity," Working Papers 2010-14, Swiss National Bank.
    5. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
    6. Shin-ichi Fukuda & Mariko Tanaka, 2016. "Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from the Australian Dollar and the NZ Dollar," CIRJE F-Series CIRJE-F-1032, CIRJE, Faculty of Economics, University of Tokyo.
    7. Fukunaga, Ichiro & Kato, Naoya, 2016. "Japanese repo and call markets before, during, and emerging from the financial crisis," Journal of the Japanese and International Economies, Elsevier, vol. 39(C), pages 17-34.
    8. Fukuda, Shin-ichi, 2012. "Market-specific and currency-specific risk during the global financial crisis: Evidence from the interbank markets in Tokyo and London," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3185-3196.
    9. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    10. Baba, Naohiko & Packer, Frank, 2009. "Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1953-1962, November.
    11. Moessner, Richhild & Allen, William A., 2013. "Central bank swap line effectiveness during the euro area sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 167-178.
    12. Shin-ichi Fukuda, 2016. "Regional Liquidity Risk and Covered Interest Parity during the Global Financial Crisis: Evidence from Tokyo, London, and New York ," CIRJE F-Series CIRJE-F-1017, CIRJE, Faculty of Economics, University of Tokyo.
    13. Fong, Wai-Ming & Valente, Giorgio & Fung, Joseph K.W., 2010. "Covered interest arbitrage profits: The role of liquidity and credit risk," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1098-1107, May.
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