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Strong Sterling Pound and Weak European Currencies in the Crises: Evidence from Covered Interest Parity of Secured Rates

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  • Shin-ichi Fukuda

Abstract

In the post Lehman period, the interest rate of the US dollar became low on the forward contract because of“flight to quality” to the international currency. However, in the Euro crisis, that of the Sterling pound became equally low, while the other European currencies such as the Danish kroner increased its liquidity premium. By using secured rates, the following analysis examines why the Sterling pound and the Danish kroner showed asymmetric features in deviations from the covered interest parity (CIP) condition. The regression results suggest that there was a structural break in the determinants of the deviations across the European currencies in the two crises. Currency-specific money market risk was critical in explaining the deviations in the global financial crisis (GFC), while EU banks’ credit risk and market risk were useful in explaining the deviations in the Euro crisis. In particular, EU banks’ credit risk and market risk had asymmetric effect on the deviations. The asymmetry explains different features between the Sterling pound and the Danish kroner.

Suggested Citation

  • Shin-ichi Fukuda, 2016. "Strong Sterling Pound and Weak European Currencies in the Crises: Evidence from Covered Interest Parity of Secured Rates," NBER Working Papers 21938, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21938
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    1. Fukuda, Shin-ichi & Tanaka, Mariko, 2017. "Monetary policy and covered interest parity in the post GFC period: Evidence from the Australian dollar and the NZ dollar," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 301-317.
    2. Shin-ichi Fukuda, 2016. "Regional Liquidity Risk and Covered Interest Parity During the Global Financial Crisis: Evidence from Tokyo, London, and New York," International Economic Journal, Taylor & Francis Journals, vol. 30(3), pages 339-359, July.
    3. MASUJIMA Yuki, 2019. "Time-Variant Safe-Haven Currency Status and Determinants," Discussion papers 19048, Research Institute of Economy, Trade and Industry (RIETI).
    4. Alfred Wong & Jiayue Zhang, 2018. "Breakdown of covered interest parity: mystery or myth?," BIS Papers chapters, in: Bank for International Settlements (ed.), The price, real and financial effects of exchange rates, volume 96, pages 57-78, Bank for International Settlements.
    5. Alfred Wong & Jiayue Zhang, 2018. "FIW-Working Paper No. 182: Breakdown of covered interest parity: mystery or myth?," FIW Working Paper series 182, FIW.

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    More about this item

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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