Deviations from the Covered Interest Rate Parity

Mads R√łnfeldt Nielsen

Student thesis: Master thesis

Abstract

Within this paper, I study the significance and persistence of the returns from the Covered Interest Rate Parity (CIP) subject to bid/ask spread and transaction costs. Afterwards, two explanations for the existence of deviations from the CIP are presented. I find that the NZD and AUD strategies perform especially poorly. The returns are found to be independent from the measurable risk premiums applied. The disclosure requirements introduced in Jan. 2015 are shown to significantly increase the Cross-Currency Basis for the one-week maturities. Furthermore, there is a correlation between the Cross-Currency Basis and the foreign xIBOR, indicating that a supply and demand mismatch causes the forward rate prices to break from the CIP.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages47