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A Three-Variable Benchmark for Post-GFC Covered Interest Parity Deviations

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  • Useong Shin

Abstract

This paper proposes a public daily-frequency benchmark for post-GFC government-bond CIP deviations. Although CIP deviations are observed daily, the literature lacks a canonical benchmark for daily regressions comparable to standard factor models in asset pricing. Using G10 plus KRW currency-tenor panels, I show that three lagged public state variables-NFCI, the nominal broad U.S. dollar index, and the Treasury 10-year minus 2-year slope-deliver strong in-sample and leave-one-year-out performance. Cointegration, quarter-end, and aggregation-difference diagnostics suggest that the benchmark captures a persistent background component rather than short-maturity quarter-end spikes or spurious level correlation.

Suggested Citation

  • Useong Shin, 2026. "A Three-Variable Benchmark for Post-GFC Covered Interest Parity Deviations," Papers 2605.20137, arXiv.org, revised May 2026.
    • Handle: RePEc:arx:papers:2605.20137
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    References listed on IDEAS

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    1. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-338, April.
    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. Wenxin Du & Jesse Schreger, 2016. "Local Currency Sovereign Risk," Journal of Finance, American Finance Association, vol. 71(3), pages 1027-1070, June.
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