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  • P-ISSN 1738-656X
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한국개발연구. Vol. 34, No. 1, March 2012, pp. 29-52

https://doi.org/10.23895/kdijep.2012.34.1.29

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Margin and Funding Liquidity: An Empirical Analysis on the Covered Interest Parity in Korea

Dae hee Jeong

Author & Article History

Manuscript .

Abstract

During the global financial turmoil in 2007-2008, deviation from the covered interest parity (CIP) between the Korean won and US dollar through the foreign exchange swap has escalated in its magnitude beyond 1,000bp in November 2008, and it still persists around 100bp level. In this paper, we examine a newly developed margin based asset pricing model using Kalman filter approach and show that the escalation of the CIP deviation is found to be significantly related to the global dollar funding illiquidity and country-specific funding conditions. Furthermore, we find evidence that the poor funding conditions (or higher margins) are driven by the general money market illiquidity and may lead to higher funding illiquidity, which suggests the reinforcing effects of the liquidity spiral. We also show that the supply of dollar liquidity and improved funding conditions help alleviate the deviations from the parity, however the persistent anomaly is found to be related to the high level of volatility in the FX swap market.

Keywords

Covered Interest Parity(무위험 이자율 평형), Margin(증거금), FX Swap(외환스와프), Arbitrage(차익거래), Shadow cost of Capital(잠재자본비용)

JEL Code

D3, D4, A7, A4, A0

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