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Title: |
Overnight Covered Interest Parity: Theory and
Practice |
| Author: |
Kia, Amir |
| Author
Affiliation: |
Bank of Canada |
| Source: |
International Economic Journal, Spring 1996, v. 10, no. 1, pp. 59-82 |
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Publication Date: |
Spring 1996 |
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Abstract: |
This study shows, both theoretically and
empirically, that in a world where capital as well as exchange markets
are imperfect it is incorrect to employ mid-market rates to estimate CIP
relationships. Developing and using the correct specification, we
estimated covered interest parity relationships between the overnight
U.S. Euro-dollar and Canadian interbank markets, for the 1986-1992
period. It was found that covered interest parity holds for both
directions. However, the speed and pattern of adjustments with which
potential arbitrage profits are eliminated are not symmetric between
U.S. Euro-dollar and Canadian interbank markets. |
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