Abstract
In two recent articles in thisJournal (April 1975 and December 1977), Frenkel and Levich (henceforth F-L) undertook the very difficult task of trying to show that most discrepancies from covered interest arbitrage parity can be explained by transaction costs in the securities and foreign-exchange markets. In this comment, I will argue that F-L's data-although perhaps the best published data available-are subject to some limitations. I will adopt F-L's methodology and will apply it to data of a higher quality. The resulting estimates of the transaction costs in the foreignexchange market are considerably lower than the estimates provided by F-L. These new estimates cast doubt on F-L's conclusion that most discrepancies from covered interest arbitrage parity for U.S. and U.K. Treasury bills for the 1962-67 and 1973-75 periods can be explained by transaction costs.
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