Abstract
The covered interest rate parity (CIP) is one of the most well-known theories in international finance. Based on arbitrage opportunities, CIP connects differences in interest rates between two countries and expected exchange rate changes. Empirical data shows that the CIP was consistently valid until the financial crisis, but it has broken down since then. While deviations in times of crisis are comprehensible, it is difficult to provide clear explanations for deviations since 2014. The authors therefore take a close look at the structure of financial markets and provide empirical evidence that one-sided hedging demand, regulatory costs for banks and changes in liquidity premia induced by quantitative easing programmes are able to explain deviations from the euro/US dollar basis.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
