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Regional Liquidity Risk and Covered Interest Parity during the Global Financial Crisis: Evidence from Tokyo, London, and New York

Listed author(s):
  • Shin-ichi Fukuda

    (Faculty of Economics, The University of Tokyo)

Registered author(s):

    During the global financial crisis, there were substantial deviations from covered interest parity (CIP) condition. In particular, in the post Lehman period, the US dollar interest rate became very low on the forward market. However, the deviations from the CIP condition varied across markets. After presenting a simple model, the following analysis examines how the CIP condition between the Japanese yen and the US dollar was violated in Tokyo, London, and New York markets. We show that the CIP deviations became largest in the New York market soon after the Lehman shock but were largest in the Tokyo market in the rest of the turmoil period. The regressions suggest that market-specific credit risks and central banks’ liquidity provisions explained the difference across the markets. In particular, they indicate that larger dollar-specific risk and smaller yen-specific risk caused larger deviations in the Tokyo market.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2016/2016cf1017.pdf
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    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-1017.

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    Length: 32 pages
    Date of creation: Jun 2016
    Handle: RePEc:tky:fseres:2016cf1017
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