IDEAS home Printed from https://ideas.repec.org/a/pal/imfecr/v72y2024i1d10.1057_s41308-023-00222-x.html
   My bibliography  Save this article

Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants, and Disconnect

Author

Listed:
  • Eugenio Cerutti

    (International Monetary Fund)

  • Haonan Zhou

    (Princeton University)

Abstract

We provide a systematic empirical analysis of short-term covered interest parity (CIP) deviations for a large set of emerging market (EM) currencies. EM CIP deviations tend to be wider and more volatile compared to most G10 currencies, and may move in an opposite direction compared to G10 currencies during global risk-off episodes. Motivated by theories of financial determinants of exchange rate, we show that while offshore EM CIP deviations are sensitive to changes in FX dealers’ risk-bearing capacities and global risk aversion, onshore CIP deviations are largely unresponsive in segmented FX markets. Meanwhile, the sensitivity of offshore CIP deviations to global factors for currencies with segmented FX markets is stronger compared to their counterparts with integrated FX markets. After accounting for global factors, we find weak evidence of country default risk and FX intervention affecting EM CIP deviations.

Suggested Citation

  • Eugenio Cerutti & Haonan Zhou, 2024. "Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants, and Disconnect," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(1), pages 196-252, March.
    • Handle: RePEc:pal:imfecr:v:72:y:2024:i:1:d:10.1057_s41308-023-00222-x
    DOI: 10.1057/s41308-023-00222-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s41308-023-00222-x
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s41308-023-00222-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:imfecr:v:72:y:2024:i:1:d:10.1057_s41308-023-00222-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.