One-Way Arbitrage-Based Interest Parity

Arbeitspapier

This study is motivated by two major considerations. First, the Fletcher andTaylor (1996) approach has yet to be applied to short-date markets to assess thediminishing role of transaction costs in explaining the devjatjons of observed forwardforeign exchange prices from interest parity forward prices. Second, the role oftransaction costs in one-way arbitrage-based interest parity has not been examined.Applying the Fletcher and Taylor approach to one-way arbitrage-based interest parity inshort-date capital markets, we document three major findings: (i) a narrower neutralband around interest parity line, as implied by one-way arbitrage, does not diminish therole of transaction costs; (ii) the varjances of the estimated deviations are a decreasingfunction of the time spent outside the transactions cost band; and (iii) the magnitude ofarbitrage profits tends to be small and economically insignificant though profitableopportunities are not rare in the short-date markets studied.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 02-115/2

Classification and Topics

• Classification: Wirtschaft
• Subject: Währungsderivat ; Arbitrage ; Transaktionskosten ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Chang, Rosita P. ; Lee, Sang-Hyop ; Reid, Sean F. ; Rhee, S. Ghon
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/85974
• Last update: 10.03.2025, 11:41 AM CET