The Finance Brown Bag Seminar is held by the Institute for Finance, Banking and Insurance (WU Vienna) and the Vienna Graduate School of Finance (VGSF). It serves as a presentation platform for PhD students, faculty members, and visitors. An overview of BBS on the website of the Institute for Finance, Banking and Insurance.
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Christian Kubitza, ECB
The Implications of CIP Deviations for International Capital Flows
(joint with with Jean-David Sigaux and Quentin Vandeweyer)
We study the implications of deviations from covered interest rate parity (CIP) for international capital flows using a novel dataset covering the universe of derivatives and securities holdings in the euro area. We document that euro-area investors’ holdings of USD bonds decrease following a widening in USD-EUR CIP deviation. Consistent with a simple dynamic model of currency risk hedging, we find that investors are significantly more responsive to CIP deviations when they need to roll over existing currency derivatives. CIP-driven shifts in bond demand significantly affect government bond prices. Our findings have important implications for understanding international capital flows and financial stability.
