Uncovering Cip Deviations In Emerging Markets Distinctions Determinants And Disconnect
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Uncovering Cip Deviations In Emerging Markets Distinctions Determinants And Disconnect
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Author : Eugenio Cerutti
language : en
Publisher: International Monetary Fund
Release Date : 2023-02-10
Uncovering Cip Deviations In Emerging Markets Distinctions Determinants And Disconnect written by Eugenio Cerutti and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2023-02-10 with Business & Economics categories.
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.
Covered Interest Parity In Emerging Markets
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Author : Mai Dao
language : en
Publisher: International Monetary Fund
Release Date : 2025-03-28
Covered Interest Parity In Emerging Markets written by Mai Dao and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2025-03-28 with categories.
We study the behavior of Covered Interest Parity (CIP) deviations – aka the CIP basis - in Emerging Markets (EM). A major challenge in computing the CIP basis in EM’s lies in measuring local currency interest rates which are free of local credit risk. To do so, we construct a ‘purified’ CIP basis for eight major EM currencies using supranational bonds issued in EM local currencies and US dollar going back twenty years. We show that this ‘purified’ CIP basis aligns well with theory-implied predictions. In the cross-section and the timeseries, the basis correlates with fundamental forces driving supply and demand for dollar forwards. Shocks to global dollar funding costs, global intermediary’s balance sheet capacity, and the demand for dollar safe assets interact with currency-specific dollar hedging and funding needs in moving the CIP basis in EM’s.