HKMA researchers dig into persistent covered interest parity deviation
Authors posit forex swap dealers filter out counterparty risk from money market rates
Economists from the Hong Kong Monetary Authority's (HKMA) research arm have shed fresh light on the puzzling recent breakdown of covered interest parity, once thought to be a 'textbook' relationship.
In a recent working paper, Alfred Wong, David Leung and Calvin Ng posit that forex swap dealers are "filtering" counterparty risk from market rates when they set prices. Adding this risk term into the covered interest parity equation helps explain why the relationship sometimes appears to break down
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