Strong Sterling Pound and Weak European Currencies in the Crises: Evidence from Covered Interest Parity of Secured Rates [report]

Shin-ichi Fukuda
2016 unpublished
In the post Lehman period, the interest rate of the US dollar became low on the forward contract because of its role as international currency. However, in the Euro crisis, that of the Sterling pound became equally low, while the other European currencies increased its liquidity premium. By using secured rates, the following analysis examines why the Sterling pound and the Danish kroner showed asymmetric features in the two crises. The regression results suggest that there was a structural
more » ... s a structural break in the determinants of deviations from covered interest parity (CIP) condition across the European currencies during the crises. Currency-specific money market risk was critical in explaining the deviations in the GFC, while EU banks' credit risk were useful in explaining the deviations in the Euro crisis. The asymmetry explains different features between the Sterling pound and the Danish kroner in the two crises. JEL codes: G15, G12, F36
doi:10.3386/w21938 fatcat:agfjv6nvx5c5nimczykslvzhum