Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/246116 
Authors: 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 11/2020
Publisher: 
Norges Bank, Oslo
Abstract: 
This paper investigates the validity of Covered Interest Rate Parity (CIP) in longdated fixed 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 profit 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 differences 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 fixed income markets.
Subjects: 
Covered Interest Parity
FX-swaps
Libor
Corporate bonds
Arbitrage
Securities Lending
JEL: 
E43
F31
G15
Persistent Identifier of the first edition: 
ISBN: 
978-82-8379-165-5
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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