Den dækkede renteparitet: En undersøgelse af nularbitragebetingelsen i perioden 2007-2013

Christian Bach Jensen & Jens Rygaard Cornett

Student thesis: Diploma thesis

Abstract

Executive summary: This thesis investigates deviations from the Covered Interest Parity relation. It seeks to provide evidence of a deviation from the relation since the onset of the financial crisis in 2007 up until end of 2013 covering also deviations during the sovereign wealth crisis of 2011/2012. The thesis explains the theory of the covered interest parity relation and provides evidence of deviations concerning three major currency pairs being Euro-US dollar, US dollar-Yen and Euro-Yen. The thesis seeks to explain the deviation through a description of the events leading up to and surrounding the financial crisis with focus being on counterparty- and liquidity risk. Deviations from the covered interest parity concerning Euro-US dollar will be investigated through the development of an econometric model. The intent is to construct the strongest possible model hence the selected model will seek to explain the first difference of the deviation from the covered interest parity relation. Because the original model that sought to explain the deviation from the covered interest parity relation suffered from autocorrelation, and hence did not hold with regard to the assumptions of time series models, the thesis will be based on the second model. It is shown that significant variables in explaining the deviation are the TED Spread, Libor-OIS spreads and the US CDS premiums. This leads to the conclusion that the deviation is based on counterparty risk as well as liquidity risk. Further study using graphical analysis of the deviation in relation to the opening of USD swap lines by Fed suggests that the swap lines helped bring down the deviation to some extent. However, during fall 2008 in the midst of the crisis, the swap lines did not seem to influence the deviation. Combining the results of the model with graphical analysis and knowledge of the events during the crisis leads to the conclusion that the deviation seems to be triggered by counterparty risk that should later turn into liquidity risk. The model indicates that counterparty risk in Europe is part of the problem which corresponds with earlier research. However, the variable that specifically should express this, European CDS premiums, is not significant. This result to a certain extent seems counterintuitive and suggests that the data may have suffered deterioration during the process of creating the final dataset. Hence, the findings in this thesis should be interpreted with caution.

EducationsGraduate Diploma in Finance, (Diploma Programme) Final Thesis
LanguageDanish
Publication date2014
Number of pages77