Eugenio Cerutti, Maurice Obstfeld, Haonan Zhou, 08 October 2020

Covered interest rate parity has been a central principle in international finance, but important departures have persisted since the Global Crisis. This column argues that several macro-financial factors – reflecting risk appetite, monetary policies, and financial regulations – correlate over time with the evolution of covered interest parity deviations. The failure of covered interest rate parity has several policy implications, ranging from the domestic and international transmission of monetary policies to inefficient market allocations.

Patrick Augustin, Mikhail Chernov, Lukas Schmid, Dongho Song, 10 January 2020

Benchmark interest rates, such as LIBOR or EFFR, not only serve as indicators of the monetary policy stance but also as reference rates for the multi-trillion interest rate derivatives and mortgage markets. Since the Global Crisis, these interest rates have followed a puzzling pattern relative to the US Treasury yields, known as negative swap rates. This column describes the pattern, explains why it is puzzling, and argues that the emergence of US default risk can naturally explain negative swap spreads. 

Gino Cenedese, Pasquale Della Corte, Tianyu Wang, 19 June 2019

Deviations from covered interest parity represent, in theory, an arbitrage opportunity. This column shows that post-crisis, financial regulation may explain why this mispricing persists and cannot be arbitraged away. It also finds that more constrained dealers demand an extra premium from their clients for synthetic dollar funding relative to direct dollar funding, resulting in deviations in covered interest parity.

Koichiro Ito, Mar Reguant, 06 November 2016

In deregulated electricity markets, producers and consumers participate in auctions in forward and spot markets (‘sequential markets’) which determine the allocation of electricity production. This column asks whether financial traders should be allowed to participate in electricity markets to arbitrage a price difference between forward and spot markets. Creating a sequential market is likely to improve market efficiency and consumer welfare, and arbitrage by financial traders is likely to benefit consumers by lowering electricity prices, but from a social planner's point of view, arbitrage does not necessarily improve market efficiency.

Philippe Bacchetta, Ouarda Merrouche, 16 January 2016

Economists now tend to stress the role of global banks in the transmission of the Global Crisis. This column argues that the retrenchment of Eurozone banks opened regulatory arbitrage opportunities for US banks. The fact that US banks, and in particular the most risky US banks, fully exploited these opportunities had a salubrious effect on credit-constrained corporates and employment. It seems the move from Basel I to Basel II with risk-sensitive capital requirements amplifies the credit cycle.

Farooq Akram, Dagfinn Rime, Lucio Sarno, 25 October 2008

If markets are efficient, then there are no exploitable arbitrage opportunities. But if no one engages in arbitrage, then what eliminates such exploitable opportunities? This column puts international financial markets under the microscope and shows that arbitrage opportunities exist, but they are usually eliminated in less than five minutes. Such micro-arbitrage makes the assumption of no arbitrage safe for those looking at the bigger picture.


CEPR Policy Research