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Covered Interest Parity Lost: Understanding the Cross-Currency Basis

BIS Quarterly Review September 2016
2016
  • 43
    Citations
  • 5,268
    Usage
  • 4
    Captures
  • 1
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    43
    • Citation Indexes
      43
  • Usage
    5,268
    • Abstract Views
      4,079
    • Downloads
      1,189
  • Captures
    4
    • Readers
      3
      • SSRN
        3
    • Exports-Saves
      1
      • SSRN
        1
  • Mentions
    1
    • Blog Mentions
      1
      • Blog
        1
  • Ratings
    • Download Rank
      35,835

Paper Description

Covered interest parity verges on a physical law in international finance. And yet it has been systematically violated since the Great Financial Crisis. Especially puzzling have been the violations since 2014, even once banks had strengthened their balance sheets and regained easy access to funding. We offer a framework to think about these violations, stressing the combination of hedging demand and tighter limits to arbitrage, which in turn reflect a tighter management of risks and bank balance sheet constraints. We find empirical support for this framework both across currencies and over time.

Bibliographic Details

Claudio E. V. Borio; Robert N. McCauley; Patrick McGuire; Vladyslav Sushko

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