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Covered Interest Parity in long-dated securities

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  • Olav Syrstad

Abstract

This paper investigates the validity of Covered Interest Rate Parity (CIP) in longdated ?xed income securities. I show that common measures of CIP rely on trading strategies subject to rollover risk and credit risk, or fail to fully account for the trading costs. Hence, roundtrip CIP pro?t is generally not possible to reap when the trade is risk-free and all costs are taken into account. In particular, short-selling costs (haircuts and lending fees) and di?erences in funding spreads across currencies allow for substantial deviations from common measures of CIP without implying arbitrage opportunities. In contrast to recent research, my results lend little support to the view that stricter banking regulations have led to persistent arbitrage opportunities in long-dated ?xed income markets.

Suggested Citation

  • Olav Syrstad, 2020. "Covered Interest Parity in long-dated securities," Working Paper 2020/11, Norges Bank.
    • Handle: RePEc:bno:worpap:2020_11
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    File URL: https://hdl.handle.net/11250/2690064
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    1. Ferrara, Gerardo & Mueller, Philippe & Viswanath-Natraj, Ganesh & Wang, Junxuan, 2022. "Central bank swap lines: micro-level evidence," Bank of England working papers 977, Bank of England.

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