Deviations from covered interest parity in the emerging markets after the global financial crisis

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buir.contributor.authorÖzyıldırım, Süheyla
dc.citation.epage101765-18en_US
dc.citation.spage101765-1
dc.citation.volumeNumber85
dc.contributor.authorGeyikçi, U. B.
dc.contributor.authorÖzyıldırım, Süheyla
dc.date.accessioned2024-03-13T11:10:18Z
dc.date.available2024-03-13T11:10:18Z
dc.date.issued2023-03-25
dc.departmentDepartment of Management
dc.description.abstractIn this paper, we focus on six emerging market economies to study the magnitude of systemic and persistent deviations from covered interest parity (CIP) using daily data between January 2010 and July 2018. We show the significant role of local factors, particularly credit and liquidity risk, in explaining sustained CIP deviations in these markets. Our findings suggest that the impact of credit risk on CIP deviations in emerging market economies may take two forms. In low-carry currencies, the well-known mechanism for credit risk operates so that the increase in credit risk exacerbates CIP deviations. Conversely, in high-carry currencies, the high usage of foreign exchange swaps makes swap rates react more than domestic rates, which causes CIP to decrease. We also present evidence that cost of illiquidity is an important driver to explain CIP deviations. We demonstrate that increased liquidity in emerging market currencies is not as large to prevent CIP deviations.
dc.description.provenanceMade available in DSpace on 2024-03-13T11:10:18Z (GMT). No. of bitstreams: 1 Deviations-from-covered-interest-parity-in_2023_Journal-of-International-Fin.pdf: 2108992 bytes, checksum: 55b84bdd7d01490eeb0dd54b69c922a8 (MD5) Previous issue date: 2023-03-25en
dc.identifier.doi10.1016/j.intfin.2023.101765
dc.identifier.eissn1873-0612
dc.identifier.issn1042-4431
dc.identifier.urihttps://hdl.handle.net/11693/114683
dc.language.isoen
dc.publisherElsevier
dc.relation.isversionofhttps://doi.org/10.1016/j.intfin.2023.101765
dc.rightsCC BY-NC-ND 4.0
dc.rights.urihttps://creativecommons.org/licenses/by-nc/4.0/
dc.source.titleJournal of international financial markets institutions and money
dc.subjectCovered interest parity
dc.subjectFX swap
dc.subjectEmerging markets
dc.subjectLiquidity risk
dc.subjectCredit risk
dc.titleDeviations from covered interest parity in the emerging markets after the global financial crisis
dc.typeArticle

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