Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants and Disconnect
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Summary:
We provide a systematic empirical treatment of short-term Covered Interest Parity (CIP) deviations for a large set of emerging market (EM) currencies. EM CIP deviations have much larger volatilities than most G10 currencies and move in an opposite direction during global risk-off episodes. While off-shore EM CIP deviations are sensitive to changes in FX dealers’ risk-bearing capacities and global risk aversion, on-shore EM CIP deviations are largely unresponsive in segmented FX markets. Moreover, the sensitivity of offshore EM CIP deviations to global risk factors for currencies with segmented FX markets is stronger compared to their counterparts with integrated FX markets. We find weak evidence of country default risk affecting EM CIP deviations after accounting for global factors.
Series:
Working Paper No. 2023/028
Frequency:
regular
English
Publication Date:
February 10, 2023
ISBN/ISSN:
9798400237003/1018-5941
Stock No:
WPIEA2023028
Pages:
49
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