Covered interest parity anomaly signals trouble ahead if volatility picks up
Since the financial crisis, a persistent breakdown of covered interest parity signalled an anomaly in the market. Over the last two years the phenomenon has accentuated and policy-makers should not dismiss its meaning, warns the BIS
The Bank for International Settlements (BIS) has warned the banking sector may become an amplifier of shocks rather than an absorber if it reacts to resurgent volatility by reducing its intermediation activity like it did during the financial crisis of 2007.
In its Quarterly Review, the BIS underlined a number of warning signs that could suggest interbank liquidity drying up if volatility picks up significantly. One of the measures concerns the deviation from covered interest rate parity (CIP)
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