Balance sheet

Transaction cost

Interest rate

Computer security

Particle physics

Arbitrage

Archaeology

Economics

Computer science

Covered interest arbitrage

Asset (computer security)

Interest rate parity

Physics

Geography

Monetary economics

Quarter (Canadian coin)

Econometrics

Parity (physics)

Financial economics

Finance

The Journal of Finance

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.

Deviations from Covered Interest Rate Parity