Covered Interest Arbitrage: Then vs. Now

26 Pages Posted: 19 Dec 2004 Last revised: 15 Dec 2022

See all articles by Ted Juhl

Ted Juhl

University of Kansas - Department of Economics

William Miles

Wichita State University - W. Frank Barton School of Business

Marc Weidenmier

Claremont McKenna College - Robert Day School of Economics and Finance; National Bureau of Economic Research (NBER)

Date Written: December 2004

Abstract

We introduce a new weekly database of spot and forward US-UK exchange rates as well as interest rates to examine the integration of forward exchange markets during the classical gold standard period (1880-1914). Using threshold autoregressions (TAR), we estimate the transactions cost band of covered interest differentials (CIDs) and compare our results to studies of more recent periods. Our findings indicate that CIDs for the US-UK rate were generally larger during the classical gold standard than any period since. We argue that slower information and communications technology during the gold standard period led to fewer short-term financial flows, higher transactions costs, and larger CIDs.

Suggested Citation

Juhl, Ted and Miles, William and Weidenmier, Marc D., Covered Interest Arbitrage: Then vs. Now (December 2004). NBER Working Paper No. w10961, Available at SSRN: https://ssrn.com/abstract=633622

Ted Juhl

University of Kansas - Department of Economics ( email )

Lawrence, KS 66049
United States
785 864-2849 (Phone)

William Miles

Wichita State University - W. Frank Barton School of Business ( email )

1845 N. Fairmount
Wichita, KS 67260
United States

Marc D. Weidenmier (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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