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IMF Staff Papers Logo    Last updated: August 2004
Volume 51, Number 2
Asymmetric Arbitrage and Default Premiums Between the U.S. and Russian Financial Markets
Mark P. Taylor and Elena Tchernykh Branson

Full Text of this Article (PDF 118K)

Deviations from covered interest rate parity (CIP) and from a generalized form of CIP involving forward-forward arbitrage between the Russian Treasury bill (GKO) market and the U.S. Treasury bill market are modeled nonlinearly. We find a no-arbitrage band within which deviations are random, outside of which deviations revert to the edge of the band. The band is asymmetric, implying that small profit margins trigger arbitrage into the dollar, but large profit margins are needed to trigger arbitrage into the ruble. The bandwidth rises and the speed of mean reversion falls as the maturity increases. The findings are consistent with the existence of Russian default premiums. [JEL F31, G15]