{"title":"Covered Interest Parity Arbitrage","authors":"Dagfinn Rime, Andreas Schrimpf, O. Syrstad","doi":"10.1093/rfs/hhac026","DOIUrl":null,"url":null,"abstract":"\n To understand deviations from covered interest parity (CIP), it is crucial to account for heterogeneity in funding costs across both banks and currency areas. For most market participants, the no-arbitrage relation holds fairly well when implemented using marginal funding costs and risk-free investment instruments. However, a few high-rated banks do enjoy CIP-arbitrage opportunities. Dealers avert inventory imbalances stemming from lower-rated banks’ usage of FX swaps to obtain dollar funding by inducing opposite (arbitrage) flows from high-rated banks. Arbitrage trades are difficult to scale, however, because funding costs increase as soon as arbitrageurs increase positions.","PeriodicalId":21124,"journal":{"name":"Review of Financial Studies","volume":" ","pages":""},"PeriodicalIF":6.8000,"publicationDate":"2022-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"24","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Review of Financial Studies","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.1093/rfs/hhac026","RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 24
Abstract
To understand deviations from covered interest parity (CIP), it is crucial to account for heterogeneity in funding costs across both banks and currency areas. For most market participants, the no-arbitrage relation holds fairly well when implemented using marginal funding costs and risk-free investment instruments. However, a few high-rated banks do enjoy CIP-arbitrage opportunities. Dealers avert inventory imbalances stemming from lower-rated banks’ usage of FX swaps to obtain dollar funding by inducing opposite (arbitrage) flows from high-rated banks. Arbitrage trades are difficult to scale, however, because funding costs increase as soon as arbitrageurs increase positions.
期刊介绍：
The Review of Financial Studies is a prominent platform that aims to foster and widely distribute noteworthy research in financial economics. With an expansive editorial board, the Review strives to maintain a balance between theoretical and empirical contributions. The primary focus of paper selection is based on the quality and significance of the research to the field of finance, rather than its level of technical complexity. The scope of finance within the Review encompasses its intersection with economics. Sponsoring The Society for Financial Studies, the Review and the Society appoint editors and officers through limited terms.
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