The Term Structure of Covered Interest Rate Parity Violations

Abstract

the CDI Virtual Derivatives Workshop, and the 2020 David Backus memorial conference. An earlier version of the paper was titled "A no-arbitrage perspective on global arbitrage opportunities." The latest version is available at http://bit.ly/ CIPviolations. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Intermediary balance sheets and the treasury yield curve

“…We view the CIP violations as a proxy for dealer balance sheet costs. Due to this balance sheet cost, the term structure model features two different short rates and as a result two different yield curves, as in Augustin et al (2020). We adopt an essentially identical approach when constructing our model.…”