The determinants of covered margins

Conclusion The empirical evidence of the covered margin regressions tends to corroborate the theoretical analysis of theCM indicator. The hedging and opportunity-cost-of-arbitrage variables, as well as the speculative variable, appear in many cases as significant determinants of the size of the covered margin. This undermines the accuracy of theCM indicator because its accuracy requires that speculation alone heavily dominates the determination ofCM. Furthermore, the view that primitive arbitrage facilities interfere with the ability of arbitrage to restrain covered margins to small values was supported by the examination of the Canadian experience of the 1950's. The author would like to acknowledge the helpful comments of Leland Yeager on previous drafts of this paper. The views expressed are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of New York.