LONG-TERM COVERED INTEREST PARITY - EVIDENCE FROM CURRENCY SWAPS

This paper constructs long-term arbitrage conditions using a now well-developed mechanism for hedging long-term currency positions, the currency swap. Using the arbitrage conditions, bond yields denominated in different currencies are compared across the onshore markets of Canada, Japan, Germany, Switzerland, the United Kingdom, and the United States, and within the Euromarket. The evidence indicates that long-term financial capital is as mobile across these markets as is short-term capital. This appears to be the case both within the Euromarket and across political jurisdictions.