AN EMPIRICAL ANALYSIS OF THE IMPACT OF DIFFERENTIAL TAX RATES AND TRANSACTION COSTS UPON COVERED INTEREST-RATE-PARITY.

摘要

The dissertation looks at the effects of several market imperfections on Covered Interest-Rate-Parity (CIRP). With perfect markets, the traditional CIRP condition implies a one-to-one correspondence between the forward premium and the weighted interest differential for all currency pairings. This arbitrage-enforced condition may be violated if taxes or transaction costs are present.;The effects of taxes on CIRP are also examined. Regression analysis is performed to test for differential tax effects and changing tax regimes. Only limited support is found for these types of tax effects.;The tax deductibility of transaction costs may reduce the size of the "neutral band". For the extreme case when marginal investors pay top corporate tax rates the number of observed deviations from CIRP which can be explained is reduced by approximately 30 percent.;We conclude that the marginal investor does not face differential tax rates and may be tax-exempt. If the marginal investor is not tax-exempt then a significant number of violations of CIRP occur which are not explained by either tax effects or transaction costs.;Our study examines CIRP between 9/72 and 5/83 with weekly observations at the 3-, 6-, and 12-month maturities. We examine the relationship for both the US/UK and the US/Canadian currency pairings. The results show transaction costs increasing with maturity when estimated using Bid-Asked spreads. The "neutral band" formed by transaction costs associated with covered interest-arbitrage explains over 90 percent of the observations. Only approximately 60 percent of the observations can be explained when "one-way" arbitrage sets the boundaries for the "neutral band".