Arbeitspapier

Limits to arbitrage and deviations from covered interest rate parity

We document an increase in deviations from short-term covered interest rate parity (CIP) in the first half of 2015. Since the Swiss National Bank's (SNB) decision to abandon its minimum exchange rate policy, both the magnitude and volatility of deviations from CIP have increased across several currency pairs. The effect is particularly pronounced for pairs involving the Swiss franc. These deviations are distinct from those observed during the financial crisis. We argue that they are a consequence of reduced liquidity in foreign exchange markets, rather than imbalances in international funding markets. A reduction in the supply of forward contracts, owing to limited dealer capacity following the SNB decision, led to wide bid-ask spreads in the forward market. This friction, pertaining specifically to the foreign exchange market rather than broader funding markets, allowed deviations from CIP to persist.

Sprache
Englisch

Erschienen in
Series: Bank of Canada Staff Discussion Paper ; No. 2016-4

Klassifikation
Wirtschaft
Foreign Exchange
International Financial Markets
Thema
Exchange rates
International financial markets

Ereignis
Geistige Schöpfung
(wer)
Pinnington, James
Shamloo, Maral
Ereignis
Veröffentlichung
(wer)
Bank of Canada
(wo)
Ottawa
(wann)
2016

DOI
doi:10.34989/sdp-2016-4
Handle
Letzte Aktualisierung
10.03.2025, 11:43 MEZ

Datenpartner

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ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • Pinnington, James
  • Shamloo, Maral
  • Bank of Canada

Entstanden

  • 2016

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