A NONPARAMETRIC ANALYSIS OF COVERED INTEREST PARITY IN LONG-DATE CAPITAL-MARKETS

The financially innovative currency swap has elevated the internationa l mobility of long-term assets. Of interest is whether the covered int erest parity condition now holds in these markets, with the currency s wap as the forward-exchange risk hedge. The empirical conclusions pres ented in the paper suggest that deviations from covered interest parit y (in excess of transactions costs) are not rare. Yet, while profit op portunities are not always short-lived, an analysis of the deviations in excess of transactions costs reveals that they diminish over time, and eventually disappear.