The Term Structure of Covered Interest Rate Parity Violations

• 成果类型: Article
• 署名作者: Augustin, Patrick; Chernov, Mikhail; Schmid, Lukas; Song, Dongho
• 署名单位: McGill University; University of California System; University of California Los Angeles; University of Southern California; Johns Hopkins University; McGill University
• 刊物名称: JOURNAL OF FINANCE
• ISSN/ISSBN: 0022-1082
• DOI: 10.1111/jofi.13336
• 发表日期: 2024
• 页码: 2077-2114
• 关键词: INTEREST ARBITRAGE; Liquidity premium; deviations; RISK; Intermediaries; Currency; demand; dollar

摘要

We quantify the impact of risk-based and nonrisk-based intermediary constraints (IC) on the term structure of covered interest rate parity (CIP) violations. Using a stochastic discount factor (SDF) inferred from interest rate swaps, we value currency derivatives. The wedge between model-implied and observed derivative prices reflects the impact of nonrisk-based IC because our SDF incorporates risk-based IC. There is no wedge at short horizons, while the wedge accounts for 40% of long-term CIP violations. Consistent with IC theory, the wedge correlates with the shadow cost of intermediary capital, and the SDF-implied interest rate is a weighted average of collateralized and uncollateralized interest rates.