Segmented Money Markets and Covered Interest Parity Arbitrage

Rime, Dagfinn; Schrimpf, Andreas; Syrstad, Olav

doi:10.2139/ssrn.3057973

Cited by 48 publications

(64 citation statements)

References 28 publications

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“…Most or all of the effective CIP violations documented by Rime, Schrimpf, and Syrstad () are below the associated proportional FVAs of global banks, based on current credit spreads.…”

Section: Fva and Covered Interest Parity Violationsmentioning

confidence: 90%

“…Consistent with this, Wang et al (2016) find that big-bang upfronts widened bid-ask spreads significantly. 2 As another example, we consider the postcrisis violations of covered interest parity (CIP) documented by Du, Tepper, and Verdelhan (2018) and Rime, Schrimpf, and Syrstad (2017). For a dealer to benefit its shareholders by arbitraging a CIP violation, our FVA calculations imply that the magnitude of the CIP basis must roughly exceed the dealer's credit spread.…”

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confidence: 99%

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Funding Value Adjustments

Andersen¹,

Duffie²,

Song

2018

The Journal of Finance

145

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In this paper, we demonstrate that the funding value adjustments (FVAs) of major dealers are debt overhang costs to their shareholders. To maximize shareholder value, dealer quotations therefore adjust for FVAs. Our case studies include interest‐rate swap FVAs and violations of covered interest parity. Contrary to current valuation practice, FVAs are not themselves components of the market values of the positions being financed. Current dealer practice does, however, align incentives between trading desks and shareholders. We also establish a pecking order for preferred asset financing strategies and provide a new interpretation of the standard debit value adjustment.

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“…Most or all of the effective CIP violations documented by Rime, Schrimpf, and Syrstad () are below the associated proportional FVAs of global banks, based on current credit spreads.…”

Section: Fva and Covered Interest Parity Violationsmentioning

confidence: 90%

mentioning

confidence: 99%

Funding Value Adjustments

Andersen¹,

Duffie²,

Song

2018

The Journal of Finance

145

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“…Liao (2016) examines the implications of corporate funding cost arbitrage for CIP deviations. Rime, Schrimpf, and Syrstad (2016) focus on the role of money market segmentation for CIP deviations. Sushko et al (2016) link the estimated dollar hedging demand (quantities) for major currencies to variation in CIP deviations (prices).…”

mentioning

confidence: 99%

Deviations from Covered Interest Rate Parity

Du¹,

Tepper²,

Verdelhan

2018

The Journal of Finance

489

133

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We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed income spreads and with nominal interest rates.

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“…Indeed proofs of Equation sometimes rely on covered interest parity (CIP) in the derivation. However, there is growing evidence, especially after the 2008 financial crisis that CIP has regularly failed in major international markets including dollar‐yen (Rime, Schrimpf, & Syrstad, ). This suggests a higher degree of market segmentation in practice than is consistent with perfect capital markets, and implies a further dual hypothesis issue for both formulas.…”

Section: Mispricing With Dividend Clustering Currency Risk and Tranmentioning

confidence: 99%

Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs

Qin

Green

Sirichand

2019

Journal of Futures Markets

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This paper develops a comprehensive modified cost‐of‐carry model to study the mispricing of Nikkei 225 index futures contracts traded in Osaka, Singapore, and Chicago based on a new 19‐year data set. Using this improved model, we find that dividend clustering, currency risk, and transaction costs all play an essential role in the estimation of Nikkei mispricing. An exponential smooth transition autoregressive‐GARCH model is used to describe the international dynamics of Nikkei mispricing. The results indicate that generally mean reversion in mispricing and limits to arbitrage are driven more by transaction costs than by heterogeneous investors.

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Segmented Money Markets and Covered Interest Parity Arbitrage

Cited by 48 publications

References 28 publications

Funding Value Adjustments

Funding Value Adjustments

Deviations from Covered Interest Rate Parity

Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs

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