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Limits to arbitrage and the term structure of CIP violations

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  • Wohlfarth, Paul
  • Chen, Xiaohong

Abstract

We investigate the existence of a term structure in cross-currency swap bases, a measure for CIP violations, to identify limits to arbitrage in foreign exchange swap markets. Based on estimates from a multivariate model of USD cross-currency bases for G10 currencies that caters for a number of known intermediary constraints as well as linkages between currency pairs our findings highlight the importance of two-tiered arbitrage, risk aversion, regulation, and policy in explaining this term structure of CIP violations.

Suggested Citation

  • Wohlfarth, Paul & Chen, Xiaohong, 2024. "Limits to arbitrage and the term structure of CIP violations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:intfin:v:95:y:2024:i:c:s1042443124000970
    DOI: 10.1016/j.intfin.2024.102031
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    Keywords

    Preferred habitat; Foreign exchange markets; International finance; Covered interest parity;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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