IDEAS home Printed from
   My bibliography  Save this paper

Deviations from covered interest parity: the role played by fundamentals, financial and political turmoils and market frictions


  • Costa, Marisa Gomes da
  • Marçal, Emerson Fernandes


Recent works for mature markets on covered interest parity suggest that deviations are mean reverting but persistent particularly after 2008 crisis (Du et al., 2018). Our study aims to contribute to the literature by modelling the deviations from covered interest rate parity (CIP) of an important emerging market economy. We focus on Brazilian data given the importance of its derivative market. One of strengths of our study is the use of an agnostic approach based on automatic model selection technique robust to structural change, the Autometrics algorithm (Hendry and Doornik, 2014), to unveil possible determinants of CIP deviations from a wide information data set. We show that CIP deviations are highly sensitive to changes in Federal government total debt, level of reserves, in ation and degree of trade openness. We also document the existence of instabilities in the model due to nancial and political turmoils. These conclusions come up from the intercept correction performed by the algorithm and can be seen as byproduct of our method- ology. Finally, we collect evidence that, even after corrected for fundamentals and instability points, CIP deviations still have persistence, suggesting that market frictions play an important role in the dynamics of CIP deviations.

Suggested Citation

  • Costa, Marisa Gomes da & Marçal, Emerson Fernandes, 2019. "Deviations from covered interest parity: the role played by fundamentals, financial and political turmoils and market frictions," Textos para discussão 503, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
  • Handle: RePEc:fgv:eesptd:503

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    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:fgv:eesptd:503. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Núcleo de Computação da FGV EPGE). General contact details of provider: .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.