Covered Interest Parity: A High-Frequency, High-Quality Data Study

Profitable deviations from covered interest parity (CIP) represent riskless arbitrage opportunities and so indicate market ineffic iency. Previous empirical work on CIP uses noncontemporaneously sampl ed data and reports mixed results. This paper uses high-frequency (te n-minute), high-quality data, gathered personally by the author in th e London foreign-exchange market, to test the CIP condition. The resu lts overwhelmingly support the market-efficiency hypothesis. Copyright 1987 by The Review of Economic Studies Limited.

[1]  F. Mccormick,et al.  Covered Interest Arbitrage: Unexploited Profits? Comment , 1979, Journal of Political Economy.

[2]  Richard M. Levich.  Empirical Studies of Exchange Rates: Price Behavior, Rate Determinationand Market Efficiency , 1983 .

[3]  S. Turnovsky,et al.  Covered Interest Parity and Speculative Efficiency: Some Empirical Evidence for Australia* , 1983 .

[4]  Alan C. Stockman.  A Theory of Exchange Rate Determination , 1980, Journal of Political Economy.

[5]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[6]  Myron S. Scholes,et al.  Estimating betas from nonsynchronous data , 1977 .

[7]  Michael L. Mussa.  The Theory of Exchange Rate Determination , 1984 .

[8]  Sanford J. Grossman.  On the Impossibility of Informationally Efficient Markets , 1980 .

[9]  M. Wickens,et al.  An Empirical Investigation into the Causes of Failure of the Monetary Model of the Exchange Rate , 1986 .

[10]  Robert Z. Aliber,et al.  The Interest Rate Parity Theorem: A Reinterpretation , 1973, Journal of Political Economy.

[11]  J. Frenkel.  Elasticities and the Interest Parity Theory , 1973, Journal of Political Economy.

[12]  Exchange Rates and Monetary Policy: Modelling Sterling's Effective Exchange Rate, 1972-80 , 1981 .

[13]  Jeremy J. Siegel,et al.  The Rational Expectations Revolution in Macroeconomics , 1983 .

[14]  Dennis E. Logue,et al.  Foundations of Finance. , 1977 .

[15]  Sanford J. Grossman,et al.  Information and Competitive Price Systems , 1976 .

[16]  Richard M. Levich,et al.  Covered Interest Arbitrage: Unexploited Profits? , 1975, Journal of Political Economy.

[17]  Siddhartha Paul Tiwari,et al.  Capital Controls and Interest Rate Parity: The Japanese Experience, 1978-81 (Regulation des capitaux et niveau des taux d'interet: le cas du Japon, 1978-81) (Control de capitales y paridad de los tipos de interes: la experiencia de Japon, 1978-81) , 1981 .

[18]  W. Branson.  The Minimum Covered Interest Differential Needed for International Arbitrage Activity , 1969, Journal of Political Economy.

[19]  Kenneth S. Rogoff,et al.  Exchange rate models of the seventies. Do they fit out of sample , 1983 .

[20]  R. Marston.  Interest arbitrage in the Euro-currency markets , 1976 .

[21]  T. Agmon,et al.  The International Mobility of Short-term Covered Arbitrage Capital , 1975 .

[22]  T. Willett,et al.  The Covered-Arbitrage Schedule: A Critical Survey of Recent Developments , 1970 .