Interest arbitrage in the Euro-currency markets |
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Authors: | Richard C Marston |
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Institution: | University of Pennsylvania, Philadelphia, Pa. 19174, U.S.A. |
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Abstract: | This study investigates how interest rates in the non-dollar Euro-currency markets are determined. Each of these Euro-currency rates is linked to the Euro-dollar rate through arbitrage operations undertaken by banks. Evidence from regressions of the Euro-currency rates on the Euro-dollar rate and the corresponding forward premium confirms that each non-dollar rate adheres closely to interest parity. Arbitrage results in unifying the Euro-currency markets so that supply and demand pressures in any individual market are spread throughout other Euro-currency markets. Because of the overwhelming size of the Euro-dollar market, conditions in this market tend to dominate conditions in the remaining Euro-currency markets. |
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