IMF Working Papers

Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants and Disconnect

By Eugenio M Cerutti, Haonan Zhou

February 10, 2023

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Format: Chicago

Eugenio M Cerutti, and Haonan Zhou. "Uncovering CIP Deviations in Emerging Markets: Distinctions, Determinants and Disconnect", IMF Working Papers 2023, 028 (2023), accessed November 9, 2025, https://doi.org/10.5089/9798400237003.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We provide a systematic empirical treatment of short-term Covered Interest Parity (CIP) deviations for a large set of emerging market (EM) currencies. EM CIP deviations have much larger volatilities than most G10 currencies and move in an opposite direction during global risk-off episodes. While off-shore EM CIP deviations are sensitive to changes in FX dealers’ risk-bearing capacities and global risk aversion, on-shore EM CIP deviations are largely unresponsive in segmented FX markets. Moreover, the sensitivity of offshore EM CIP deviations to global risk factors for currencies with segmented FX markets is stronger compared to their counterparts with integrated FX markets. We find weak evidence of country default risk affecting EM CIP deviations after accounting for global factors.

Subject: Currencies, Currency markets, Emerging and frontier financial markets, Financial markets, Financial services, Foreign exchange, Forward exchange rates, Interest rate parity, Money

Keywords: CIP deviation, Country default risk, Covered interest parity, Currencies, Currency markets, Emerging and frontier financial markets, Emerging markets, Financial market arbitrage, Forward exchange rates, Forward foreign exchange market, FX Market development, Global, Interest rate differentials, Interest rate parity, Segmented FX markets, Short-term Covered Interest Parity

Publication Details

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