Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210125
Authors: 
Rime, Dagfinn
Schrimpf, Andreas
Syrstad, Olav
Year of Publication: 
2017
Series/Report no.: 
Working Paper No. 15/2017
Abstract: 
This paper studies the violation of the most basic no-arbitrage condition in international finance - Covered Interest Parity (CIP). We find that the CIP puzzle largely stems from funding liquidity differences, reflected in the marginal funding rates of the main arbitrageurs. With severe funding liquidity differences, it becomes impossible for FX swap intermediaries to quote prices such that CIP holds across the full rate spectrum. A narrow set of global top-tier banks enjoys risk-less arbitrage opportunities as dealers set quotes to avert order flow imbalances. A situation with persistent arbitrage opportunities emerges as an equilibrium outcome due to the constellation of market segmentation, the abundance of excess reserves and their remuneration in central banks' deposit facilities.
Subjects: 
covered interest parity
money market segmentation
funding liquidity premia
FX swap market
U.S. dollar funding
JEL: 
E43
F31
G15
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-995-1
Creative Commons License: 
https://creativecommons.org/licenses/by-nc-nd/4.0/deed.no
Document Type: 
Working Paper
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