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dc.contributor.authorRime, Dagfinn
dc.contributor.authorSchrimpf, Andreas
dc.contributor.authorSyrstad, Olav
dc.description.abstractThis paper studies the violation of the most basic no-arbitrage condition in international finance — Covered Interest Parity (CIP). We find that the CIP puzzle largely stems from funding liquidity differences, reflected in the marginal funding rates of the main arbitrageurs. With severe funding liquidity differences, it becomes impossible for FX swap intermediaries to quote prices such that CIP holds across the full rate spectrum. A narrow set of global top-tier banks enjoys risk-less arbitrage opportunities as dealers set quotes to avert order flow imbalances. A situation with persistent arbitrage opportunities emerges as an equilibrium outcome due to the constellation of market segmentation, the abundance of excess reserves and their remuneration in central banks’ deposit facilities.nb_NO
dc.publisherNorges Banknb_NO
dc.relation.ispartofseriesWorking Papers;15/2017
dc.rightsAttribution-NonCommercial-NoDerivatives 4.0 Internasjonal*
dc.subjectJEL: E43nb_NO
dc.subjectJEL: F31nb_NO
dc.subjectJEL: G15nb_NO
dc.subjectcovered interest paritynb_NO
dc.subjectmoney market segmentationnb_NO
dc.subjectfunding liquidity premianb_NO
dc.subjectFX swap marketnb_NO
dc.subjectU.S. dollar fundingnb_NO
dc.titleSegmented Money Markets and Covered Interest Parity Arbitragenb_NO
dc.typeWorking papernb_NO
dc.subject.nsiVDP::Samfunnsvitenskap: 200::Økonomi: 210::Samfunnsøkonomi: 212nb_NO

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Attribution-NonCommercial-NoDerivatives 4.0 Internasjonal
Except where otherwise noted, this item's license is described as Attribution-NonCommercial-NoDerivatives 4.0 Internasjonal