Covered Interest Parity in long-dated securities

Olav Syrstad

No 2020/11, Working Paper from Norges Bank

Abstract: This paper investigates the validity of Covered Interest Rate Parity (CIP) in longdated ?xed income securities. I show that common measures of CIP rely on trading strategies subject to rollover risk and credit risk, or fail to fully account for the trading costs. Hence, roundtrip CIP pro?t is generally not possible to reap when the trade is risk-free and all costs are taken into account. In particular, short-selling costs (haircuts and lending fees) and di?erences in funding spreads across currencies allow for substantial deviations from common measures of CIP without implying arbitrage opportunities. In contrast to recent research, my results lend little support to the view that stricter banking regulations have led to persistent arbitrage opportunities in long-dated ?xed income markets.

Keywords: FX-swaps; LIBOR; arbitrage; securities lending; corporate bonds; covered interest parity (search for similar items in EconPapers)
Pages: 57 pages
Date: 2020-09-23
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2020_11

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