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Deviations from the Covered Interest Rate Parity

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  • Created by: Semin Ibisevic
  • Latest result: 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.3000 0.
  • Created on: 09 May 2013

Does the CIP hold between Europe and the US? A working paper by Coffrey, Hrung and Sarker (2009) finds evidence of deviations from the Covered Interest Parity (CIP) relation since the onset of the crisis in August 2007.

The first grap plots the ratio between the 1-Month forward rate and the spot rate on the EUR/USD [F/S] and the ratio between the the 1-period domestic (Euribor) rate and foreign interest rate (1-Month USD Libor) [EU/US]. The second grap plots this difference and the third grap plots the Forward rate against the Spot rate.

Note: transaction costs are not taken into account.

Plot Image
% time2018 and data2018 available for use
% for USD Libor 1-Month
% 
% time2012 and data2012 available for use
% for EUR/USD Spot Bid
% 
% time2013 and data2013 available for use
% for EUR/USD Spot Ask
% 
% time2008 and data2008 available for use
% for EUR/USD Forward 1-Month Bid
% 
% time2011 and data2011 available for use
% for EUR/USD Forward 1-Month Ask
% 
% time2014 and data2014 available for use
% for Euribor 1-Month rate
% 
% time2014 and data2014 available for use
% for Euribor 1-Month rate
%
% time2015 and data2015 available for use
% for Daily Treasury Yield Curve Rates (1-Month)

data2015

% definitions
rEU = data2014./100
rUS = data2015./100
rUS2 = data2018./100
enen = ones(size(rEU));

F = mean([data2008 data2011],2);
S = mean([data2012 data2013],2);

y1= (F./(1+rEU))./;
y2=(enen+rEU)./(enen+rUS2);

subplot(2,1,1)
hold on;
plot(time2008, y1, 'b-');
plot(time2014, y2, 'r--');
datetick%('x','ddmmyyyy')
title('F/S (-) and EU/US (--)');

subplot(2,1,2)
hold on;
plot(time2008, y1-y2, 'k-');
%legend('Difference', 'Location', 'EastOutside');
datetick%('x','ddmmyyyy')
title('Difference between F/S and EU/US');

%subplot(3,1,3)
%hold on;
%plot(time2008, F, 'm--');
%plot(time2014, S, 'g-');
%legend('Forward','Spot', 'Location', 'EastOutside');
%datetick%('x','ddmmyyyy')
%title('Forward (--) and Spot rate (-)');
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