A Three-Variable Benchmark for Post-GFC Covered Interest Parity Deviations

TL;DR

This paper introduces a new daily benchmark for post-GFC government-bond CIP deviations using three key lagged variables, enhancing the analysis of deviations with a robust, persistent background component.

Contribution

It develops the first canonical daily benchmark for CIP deviations based on three lagged public variables, improving upon prior lack of standardized daily models.

Findings

Three lagged variables show strong in-sample and out-of-sample performance.

The benchmark captures a persistent background component, not short-term spikes.

Diagnostics suggest the model reflects genuine long-term relationships.

Abstract

This paper proposes a public daily-frequency benchmark for post-GFC government-bond CIP deviations. Although CIP deviations are observed daily, the literature lacks a canonical benchmark for daily regressions comparable to standard factor models in asset pricing. Using G10 plus KRW currency-tenor panels, I show that three lagged public state variables-NFCI, the nominal broad U.S. dollar index, and the Treasury 10-year minus 2-year slope-deliver strong in-sample and leave-one-year-out performance. Cointegration, quarter-end, and aggregation-difference diagnostics suggest that the benchmark captures a persistent background component rather than short-maturity quarter-end spikes or spurious level correlation.