Significant deviations from covered interest parity were observed during the financial crisis of 2007-2009. This paper finds that before the failure of Lehman Brothers the market-wide funding liquidity risk was the main determinant of these deviations in terms of the premiums on swap-implied US...

When US dollar interbank markets malfunctioned during the global financial crisis of 2008, many non-US financial institutions relied heavily on the foreign-exchange (FX) swap markets for US-dollar funds. This one-sided market induced a risk premium of the FX swap-implied US-dollar rate across a...