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"Swap" Covered Interest Parity in Long-Date Capital Markets

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  • Fletcher, Donna J
  • Taylor, Larry W

Abstract

Using the currency swap as the forward-exchange risk hedge, the covered interest parity condition in the long-date capital markets is evaluated. Of interest is the extent to which deviations from parity can be attributed to transactions costs. The empirical conclusions presented in the paper suggest that, although (on average) transactions costs account for deviations from parity, net deviations (in excess of transactions costs) are neither rare nor short-lived. Yet an analysis of the variance structure of covered interest parity reveals that these profit opportunities diminish over time and eventually disappear. Copyright 1996 by MIT Press.

Suggested Citation

  • Fletcher, Donna J & Taylor, Larry W, 1996. ""Swap" Covered Interest Parity in Long-Date Capital Markets," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 530-538, August.
  • Handle: RePEc:tpr:restat:v:78:y:1996:i:3:p:530-38
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    Cited by:

    1. Pippenger, John, 2017. "Forward Bias, The Failure Of Uncovered Interest Parity And Related Puzzles," University of California at Santa Barbara, Economics Working Paper Series qt2ff194s2, Department of Economics, UC Santa Barbara.
    2. Klaas Knot & Jan Marc Berk, 1999. "Co-Movements in Long-Term Interest Rates and the Role of PPP-Based Exchange Rate Expectations," IMF Working Papers 99/81, International Monetary Fund.
    3. Du, Wenxin & Schreger, Jesse, 2013. "Local Currency Sovereign Risk," International Finance Discussion Papers 1094, Board of Governors of the Federal Reserve System (U.S.).
    4. Rosita P. Chang & Sang-Hyop Lee & Sean F. Reid & S. Ghon Rhee, 2002. "One-Way Arbitrage-Based Interest Parity," Tinbergen Institute Discussion Papers 02-115/2, Tinbergen Institute.
    5. Jen-Chi Cheng & Larry Taylor & Wenlong Weng, 2010. "The links between international parity conditions and Granger causality: a study of exchange rates and prices," Applied Economics, Taylor & Francis Journals, vol. 42(27), pages 3491-3501.
    6. Baba, Naohiko & Sakurai, Yuji, 2011. "When and how US dollar shortages evolved into the full crisis? Evidence from the cross-currency swap market," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1450-1463, June.
    7. Benjamin H Cohen, 2005. "Currency choice in international bond issuance," BIS Quarterly Review, Bank for International Settlements, June.
    8. 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.
    9. Berk, Jan Marc & Knot, Klaas H. W., 2001. "Testing for long horizon UIP using PPP-based exchange rate expectations," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 377-391, February.
    10. McBrady, Matthew R. & Schill, Michael J., 2007. "Foreign currency-denominated borrowing in the absence of operating incentives," Journal of Financial Economics, Elsevier, vol. 86(1), pages 145-177, October.
    11. Murat Duran & Doruk Kucuksarac, 2012. "Are Swap and Bond Markets Alternatives to Each Other in Turkey?," Working Papers 1223, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    12. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
    13. Kuga Iakov & Elena Kuzmina, 2016. "Covered interest parity: evidence from Russian money market," EERC Working Paper Series 16/01e, EERC Research Network, Russia and CIS.
    14. Maurizio Michael Habib & Mark Joy, 2010. "Foreign-currency bonds: currency choice and the role of uncovered and covered interest parity," Applied Financial Economics, Taylor & Francis Journals, vol. 20(8), pages 601-626.

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