The Covered-Arbitrage Schedule: A Critical Survey of Recent Developments
About: This article is published in Journal of Money, Credit and Banking.The article was published on 1970-05-01. It has received 86 citations till now. The article focuses on the topics: Schedule & Arbitrage.
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TL;DR: In this article, an intertemporal model of international asset pricing is constructed which admits differences in consumption opportunity sets across countries, and it is shown that the real expected excess return on a risky asset is proportional to the covariance of the return of that asset with changes in the world real consumption rate.
823 citations
TL;DR: In this article, the authors provide analytical formulas for European put and call options on the minimum or the maximum of two risky assets, which are useful to price a wide variety of contingent claims of interest to financial economists.
509 citations
TL;DR: In this article, the authors provided a procedure for estimating transaction costs in the markets for foreign exchange and for securities and concluded that empirical data are consistent with the interest parity theory and that covered interest arbitrage does not entail unexploited profit opportunities.
Abstract: Empirical studies of covered interest arbitrage suggest that the parity condition is not always satisfied and thus implying unexploited profit opportunities. This paper provides a procedure for estimating transaction costs in the markets for foreign exchange and for securities. Allowance for these costs accounts for most of the apparent profit opportunities. It is shown that in addition to transaction costs, demand and supply elasticities in the various markets and lags in executing arbitrage can account for all of the apparent profit opportunities. It is concluded that empirical data are consistent with the interest parity theory and that covered interest arbitrage does not entail unexploited profit opportunities.
451 citations
TL;DR: In this paper, the forward exchange rate is compared to the money-market interest differential, where F = the forward rate, S = the spot exchange rate, rd = the domestic interest rate, and rf = the foreign interest rate.
Abstract: Analyses of behavior in the foreign exchange market frequently rely on the interest rate parity theorem (Stein 1962; Glahe 1967). This theorem relates the forward exchange rate to the money-market interest differential, (F S)/S = rd rf, where F = the forward exchange rate, S = the spot exchange rate, rd = the domestic interest rate, and rf = the foreign interest rate.1 These analyses are based on the differential between the observed forward rate and the forward rate predicted from the interest agio, for example, on observed departures from interest parity. What remains unexplained is why there are unexploited profit opportunities for arbitrage and the significance of the theorem in view of the exceptions. 2
334 citations
TL;DR: In this article, the effects of transaction costs on the efficacy of covered interest arbitrage during three periods: 1962-67, the tranquil peg; 1968-69, the turbulent peg; and 1973-75, the managed float were examined.
Abstract: This paper deals with the effects of transaction costs on the efficacy of covered interest arbitrage during three periods: 1962-67, the tranquil peg; 1968-69, the turbulent peg; and 1973-75, the managed float. Several conclusions emerge: (i) during the managed float transaction costs have risen dramatically, (ii) these costs played a similar role in accounting for deviations from parity during the periods of the tranquil peg and the managed float but not during the turbulent peg. Similar conclusions emerge from a time-series analysis of the various exchange rates with the implication that a classification of periods according to the degree of turbulence is preferred to a classification based on the legal arrangement (e.g., pegged or floating rates), and (iii) covered interest arbitrage does not seem to entail unexploited opportunities for profits.
328 citations