Discussion paper

DP14774 The term structure of CIP violations

We quantify the impact of risk-based and non-risk-based intermediary constraints (IC) on the term structure of CIP violations. Using a stochastic discount factor (SDF) inferred from interest rate swaps, we value currency derivatives. The wedge between model-implied and observed derivative prices reflects the impact of non-risk-based IC because our SDF incorporates risk-based IC. There is no wedge at short horizons, while the wedge accounts for 30% of long-term CIP violations. Consistent with IC theory, the wedge correlates with the shadow cost of intermediary capital, and the SDF-implied interest rate is a weighted average of collateralized and uncollateralized interest rates.


Augustin, P, M Chernov, L Schmid and D Song (2020), ‘DP14774 The term structure of CIP violations‘, CEPR Discussion Paper No. 14774. CEPR Press, Paris & London. https://cepr.org/publications/dp14774