Covered interest parity and long-term bonds
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First, the major result of Liao (2016) was reproduced, with 3 additional currencies and 6 more years of data. [Gordon Y. Liao. Credit Migration and Covered Interest Rate Parity. Working Paper 468601, Harvard University, October 2016.] Second, Liao’s model was tested using government rates, which showed a better fit than when using swap rates, as in Liao’s work. Lastly, CIP deviations were calculated from long-term corporate bond rates. Since 2012, the CIP deviations measured using corporate bonds are lower than those calculated from swap and government rates, and are of a scale where banks could be expected to make arbitrage trades.