Fong, W and Valente, G and Fung, JKW (2010) Covered interest arbitrage profits: The role of liquidity and credit risk. Journal of Banking & Finance, 34 (5). pp. 1098-1107. DOI https://doi.org/10.1016/j.jbankfin.2009.11.008
Fong, W and Valente, G and Fung, JKW (2010) Covered interest arbitrage profits: The role of liquidity and credit risk. Journal of Banking & Finance, 34 (5). pp. 1098-1107. DOI https://doi.org/10.1016/j.jbankfin.2009.11.008
Fong, W and Valente, G and Fung, JKW (2010) Covered interest arbitrage profits: The role of liquidity and credit risk. Journal of Banking & Finance, 34 (5). pp. 1098-1107. DOI https://doi.org/10.1016/j.jbankfin.2009.11.008
Abstract
We study the profitability of Covered Interest Parity (CIP) arbitrage violations and their relationship with market liquidity and credit risk using a novel and unique dataset of tick-by-tick firm quotes for all financial instruments involved in the arbitrage strategy. The empirical analysis shows that positive CIP arbitrage deviations include a compensation for liquidity and credit risk. Once these risk premia are taken into account, small arbitrage profits only accrue to traders who are able to negotiate low trading costs. The results are robust to stale pricing and the nonsynchronous trading occurring in the markets involved in the arbitrage strategy.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | Exchange rates; Arbitrage; Covered interest rate parity; Foreign exchange microstructur |
| Subjects: | H Social Sciences > HG Finance |
| Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
| SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
| Depositing User: | Unnamed user with email elements@essex.ac.uk |
| Date Deposited: | 24 Nov 2011 09:59 |
| Last Modified: | 06 Jan 2022 13:37 |
| URI: | http://repository.essex.ac.uk/id/eprint/1565 |