Norges Bank

Working Paper

Covered Interest Parity in long-dated securities

Author:
Olav Syrstad
Series:
Working Paper
Number:
11/2020

Abstract

This paper investigates the validity of Covered Interest Rate Parity (CIP) in longdated fixed income securities. I show that common measures of CIP rely on trading strategies subject to rollover risk and credit risk, or fail to fully account for the trading costs. Hence, roundtrip CIP profit is generally not possible to reap when the trade is risk-free and all costs are taken into account. In particular, short-selling costs (haircuts and lending fees) and differences in funding spreads across currencies allow for substantial deviations from common measures of CIP without implying arbitrage opportunities. In contrast to recent research, my results lend little support to the view that stricter banking regulations have led to persistent arbitrage opportunities in long-dated fixed income markets.

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ISSN 1502-8190 (online)

Published 28 September 2020 10:30
Published 28 September 2020 10:30