IFin Seminar, Patrick Augustin - McGill "The term structure of covered interest rate parity violations"

Institute of Finance

Date: 10 February 2022 / 12:25 - 13:40

Speaker: IFin Seminar, Patrick Augustin - McGill

Title:       “The term structure of covered interest rate parity violations”

Date:      February 10, 2022

Time:       12:25 - 13:40

Room:    A11 (red building)

Lugano Campus



“We show theoretically that persistent deviations from covered interest parity (CIP) across multiple horizons imply simultaneous arbitrage opportunities only if uncollateralized interbank lending rates are riskless. In the absence of observable riskless discount rates, we extract them empirically from interest rate swaps using a simple no-arbitrage framework. They deliver novel quantitative benchmarks that reconcile a zero cross-currency basis with non-zero cross-currency basis swap rates.  We quantify that the no-arbitrage benchmark  accounts for about two thirds of the alleged CIP deviations. The residual pricing errors are associated with intermediary constraints.”