This paper tests covered interest parity at Russian money market over period of 2010-2014 and studies scale and sources of deviations from it. We use both offered and actual interbank interest rates for four different terms. Average deviations from the parity vary between 8 and 105 basis points depending on rates and terms. We test credit risk, turbulence and monetary policy as explanation of these deviations and assessed them quantitatively. For example, one standard deviation change in credit risk is responsible for 50 per cent of the average deviation from parity compared to 72 per cent due to monetary policy spread and (minus) 22 per cent due to turbulence for one week offered rate spread. Risk and turbulence effects grow with maturity and higher for actual rate spreads.
Working paper info
Covered interest parity: evidence from Russian money market
Kuga Iakov, Kuzmina Elena
C. Macro, financial markets and open macroeconomy