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Covered Interest Arbitrage: Then versus Now

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  • TED JUHL
  • WILLIAM MILES
  • MARC D. WEIDENMIER

Abstract

We introduce a new weekly database of spot and forward US–UK exchange rates and interest rates to examine the integration of forward exchange markets during the classical Gold Standard period (1880–1914). Using threshold autoregressions (TARs), we estimate the transaction cost band of covered interest differentials (CIDs) and compare our results with studies of more recent periods. We find that CIDs for the US–UK rate were generally largest during the classical Gold Standard. We argue that slower information and communications technology during the Gold Standard period led to fewer short‐term financial flows, higher transaction costs and larger CIDs.

Suggested Citation

  • Ted Juhl & William Miles & Marc D. Weidenmier, 2006. "Covered Interest Arbitrage: Then versus Now," Economica, London School of Economics and Political Science, vol. 73(290), pages 341-352, May.
    • Handle: RePEc:bla:econom:v:73:y:2006:i:290:p:341-352
    DOI: 10.1111/j.1468-0335.2006.00500.x
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    References listed on IDEAS

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    1. Maurice Obstfeld & Alan M. Taylor, 2003. "Globalization and Capital Markets," NBER Chapters, in: Globalization in Historical Perspective, pages 121-188, National Bureau of Economic Research, Inc.
    2. Gauri Prakash & Alan M. Taylor, 1997. "Measuring Market Integration: A Model of Arbitrage with an Econometric Application to the Gold Standard, 1879-1913," NBER Working Papers 6073, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Hanes, Christopher & Rhode, Paul W., 2013. "Harvests and Financial Crises in Gold Standard America," The Journal of Economic History, Cambridge University Press, vol. 73(1), pages 201-246, March.
    2. Nils Herger, 2018. "Interest-parity conditions during the era of the classical gold standard (1880–1914)—evidence from the investment demand for bills of exchange in Europe," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 154(1), pages 1-12, December.
    3. Nidhi Aggarwal & Sanchit Arora & Rajeswari Sengupta, 2021. "Capital account liberalisation in a large emerging economy: An Analysis of onshore-offshore arbitrage," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-013, Indira Gandhi Institute of Development Research, Mumbai, India.
    4. Hernández Juan R., 2020. "Covered Interest Parity: A Stochastic Volatility Approach to Estimate the Neutral Band," Working Papers 2020-02, Banco de México.
    5. Perlin, Marcelo & Dufour, Alfonso & Brooks, Chris, 2010. "The Drivers of Cross Market Arbitrage Opportunities: Theory and Evidence for the European Bond Market," MPRA Paper 23381, University Library of Munich, Germany.
    6. Marcelo Perlin & Alfonso Dufour & Chris Brooks, 2014. "The determinants of a cross market arbitrage opportunity: theory and evidence for the European bond market," Annals of Finance, Springer, vol. 10(3), pages 457-480, August.
    7. Matthew Ames & Guillaume Bagnarosa & Gareth W. Peters, 2013. "Reinvestigating the Uncovered Interest Rate Parity Puzzle via Analysis of Multivariate Tail Dependence in Currency Carry Trades," Papers 1303.4314, arXiv.org, revised Jan 2014.
    8. Matthew Ames & Gareth W. Peters & Guillaume Bagnarosa & Ioannis Kosmidis, 2014. "Upside and Downside Risk Exposures of Currency Carry Trades via Tail Dependence," Papers 1406.4322, arXiv.org.
    9. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
    10. Ames, Matthew & Bagnarosa, Guillaume & Peters, Gareth W., 2017. "Violations of uncovered interest rate parity and international exchange rate dependences," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 162-187.
    11. Dupuy, Philippe & James, Jessica & Marsh, Ian W., 2021. "Attractive and non-attractive currencies," Journal of International Money and Finance, Elsevier, vol. 110(C).
    12. Nidhi Aggarwal & Sanchit Arora & Rajeswari Sengupta, 2022. "Capital account openness in India and a comparison with China: Then versus now," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2022-005, Indira Gandhi Institute of Development Research, Mumbai, India.
    13. Juan R. Hernández, 2024. "Covered interest parity: a forecasting approach to estimate the neutral band," BIS Working Papers 1206, Bank for International Settlements.
    14. Xiao-Ming Li, 2014. "Rethinking Long Memory and Structural Breaks in the Forward Premium," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(4), pages 455-485, September.

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