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Deviation from Covered Interest Rate Parity in Korea

Author

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  • Lee, Seungho

    (The Bank of Korea)

Abstract

This paper tested the factors which cause deviation from covered interest rate parity (CIRP) in Korea, using regression and VAR models. The empirical evidence indicates that the difference between the swap rate and interest rate differential exists and is greatly affected by variables which represent the currency liquidity situation of foreign exchange banks. In other words, the deviation from CIRP can easily occur due to the lack of foreign exchange liquidity of banks in a thin market, despite few capital constraints, small transaction costs, and trivial default risk in Korea.

Suggested Citation

  • Lee, Seungho, 2003. "Deviation from Covered Interest Rate Parity in Korea," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 7(1), pages 125-141, June.
    • Handle: RePEc:ris:eaerev:0220
    DOI: 10.11644/KIEP.JEAI.2003.7.1.104
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    More about this item

    Keywords

    Covered Interest Rate Parity; Swap Rate; Currency Liquidity;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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