Browsing by Subject "Empirical analysis of global currency markets"

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Fundamental parity conditions in international finance
(2024) Mößler, Markus; Jung, Robert
This thesis investigates the persistent deviations from Covered Interest Rate Parity (CIP), a cornerstone arbitrage condition in international finance, which have increasingly surfaced since the Global Financial Crisis (GFC) of 2007–2008. Despite the CIP condition being fundamental to the valuation of foreign exchange instruments, significant and sustained violations have challenged its empirical validity and puzzled both academics and practitioners. This study provides a comprehensive theoretical and empirical analysis of the CIP condition and its deviations, focusing on the contemporaneous and dynamic relationships between interest and exchange rates, as well as the role of arbitrage bounds. Employing a cointegrated regression model, the thesis first analyzes the structure of arbitrage strategies implied by CIP. It then utilizes a cointegrated vector autoregressive (VAR) model to assess the persistence of deviations and the speed of adjustment toward CIP equilibrium. Furthermore, the role of arbitrage bounds, such as transaction costs, is examined as a potential explanation for post-GFC anomalies. A macro-level comparison across multiple currency pairs, maturities, and time periods complements the analysis, extending beyond the traditionally studied USD-centric frameworks. The empirical findings reveal that while CIP held before the GFC, deviations became both large and persistent in the aftermath—particularly for the USD/EUR pair—with no sufficient justification from arbitrage bounds alone. The estimated arbitrage strategy weights and slower post-crisis adjustment dynamics underscore structural shifts in market functioning. These insights contribute to a deeper understanding of modern financial market frictions and open pathways for further research into evolving global financial architectures.