The failure of covered interest parity (CIP), or, equivalently, the persistence of the cross currency basis, in tranquil markets has presented a puzzle. Focusing on the basis against the US dollar (USD), we show that the CIP deviations that are not due to transaction costs or bank credit risk...

The failure of covered interest parity (CIP), or, equivalently, the persistence of cross-currency basis, in tranquil markets has posed a puzzle. By analysing the term structure of CIP deviations, we empirically establish that imbalances in the demand for and supply of FX hedges exert first order...

Covered interest parity verges on a physical law in international finance. And yet it has been systematically violated since the Great Financial Crisis. Especially puzzling have been the violations since 2014, even once banks had strengthened their balance sheets and regained easy access to...