Insured uncovered interest parity |
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| Authors: | Yiuman Tse John K Wald |
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| Institution: | 1. University of Missouri – St. Louis, Department of Finance, College of Business Administration, United States;2. University of Texas at San Antonio, Department of Finance, College of Business Administration, United States |
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| Abstract: | The current literature suggests that uncovered interest parity (UIP) does not hold because of differences in risk in holding different currency denominated debt. We test whether this risk is related to sovereign credit risk in government bonds. We consider an insured uncovered interest parity relationship – that is, one where debt is insured with credit default swap (CDS) contracts. CDS rates help explain the UIP puzzle but have no predictive power for carry trade returns and currency movements. |
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| Keywords: | Uncovered interest parity Carry trade CDS |
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