@article{e7e808a0bf924d01b7d1ecbc52a7e522,
title = "Covered interest arbitrage profits: The role of liquidity and credit risk",
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 = "Arbitrage, Covered interest rate parity, Exchange rates, Foreign exchange microstructure",
author = "Fong, {Wai Ming} and Giorgio Valente and FUNG, {Joseph K W}",
note = "Funding Information: The authors are grateful to Ike Mathur (Editor) and an anonymous referee for constructive comments. They also would like to thank Bruno Biais, John Cotter, Andrew Filardo, Hans Genberg, Leo Goodstadt, Jacob Gyntelberg, Mico Loretan, Anthony Neuberger, Richard Payne, Eli Remolona, Mark Salmon, Lucio Sarno, Alex Stremme, Andy Rose, Dagfinn Rime, Mark Taylor for useful conversations on an earlier draft of this paper and to the participants in presentation to the 5th Conference of the Asia-Pacific Association of Derivatives, Busan, Korea; the 6th HKIMR Summer Workshop, Hong Kong, Norges Bank, University of Bristol, Cass Business School, the Chinese University of Hong Kong, Rotterdam School of Management, University College Dublin, University of Toulouse, University of Warwick, Trinity College Dublin. Part of this research has been carried out when both Fung and Valente were visiting the Hong Kong Institute for Monetary Research (HKIMR). Both authors are grateful for the hospitality received and the generous financial support. The authors alone are responsible for the views expressed in the paper and for any errors that may remain.",
year = "2010",
month = may,
doi = "10.1016/j.jbankfin.2009.11.008",
language = "English",
volume = "34",
pages = "1098--1107",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier",
number = "5",
}