Covered interest arbitrage profits: The role of liquidity and credit risk |
| |
Authors: | Wai-Ming Fong Giorgio Valente Joseph K.W. Fung |
| |
Affiliation: | 1. The Chinese University of Hong Kong, Shatin, N.T., Hong Kong;2. University of Leicester, University Road, Leicester LE1 7RH, United Kingdom;3. Hong Kong Baptist University, Kowloon Tong, Kowloon, Hong Kong |
| |
Abstract: | We study the profitability of Covered Interest Parity (CIP) arbitrage violations and their relationship with market liquidity and credit risk using a novel and unique dataset of tick-by-tick firm quotes for all financial instruments involved in the arbitrage strategy. The empirical analysis shows that positive CIP arbitrage deviations include a compensation for liquidity and credit risk. Once these risk premia are taken into account, small arbitrage profits only accrue to traders who are able to negotiate low trading costs. The results are robust to stale pricing and the nonsynchronous trading occurring in the markets involved in the arbitrage strategy. |
| |
Keywords: | F31 F41 G14 G15 |
本文献已被 ScienceDirect 等数据库收录! |
|