by In a BIS working paper, Dagfinn Rime, Andreas Schrimpf, and Olav Syrstad analyze the apparent breakdown of covered interest parity (CIP). They argue that CIP holds remarkably well for most potential arbitrageurs when applying their marginal funding rates. With severe funding liquidity differences, however, it becomes impossible for dealers 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.
Topics:
Dirk Niepelt considers the following as important: Arbitrage, Covered interest parity, Limits of arbitrage, Notes
This could be interesting, too:
Dirk Niepelt writes “Report by the Parliamentary Investigation Committee on the Conduct of the Authorities in the Context of the Emergency Takeover of Credit Suisse”
Dirk Niepelt writes “Governments are bigger than ever. They are also more useless”
Dirk Niepelt writes The New Keynesian Model and Reality
Dirk Niepelt writes Urban Roadway in America: Land Value
In a BIS working paper, Dagfinn Rime, Andreas Schrimpf, and Olav Syrstad analyze the apparent breakdown of covered interest parity (CIP). They argue that
CIP holds remarkably well for most potential arbitrageurs when applying their marginal funding rates. With severe funding liquidity differences, however, it becomes impossible for dealers 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.