I am wondering which data to use to test the Covered Interest Rate Parity between Europe and the United States. Recap that for the CIP to hold, it should mean that
F/S = (1+r)/(1+r*) where
- F = the 1-period ahead forward rate on the EUR/USD exchange rate
- S = the spot rate of the EUR/USD exchange
- r = domestic interest rate
- r* = foreign interest rate
For the forward rate I use the 1-month rates available on many resource sites, this holds true for the spot rate. However, which interest rate should I use for the domestic and foreign one?
My guess was to use the Euribor (1-Month) for the European and the Daily Treasury Yield (1-Month) or the USD Libor (1-Month).
However, then there is a huge gap between F/S and (1+r)/(1+r*); i.e. F/S yields values around 0.9-0.95 whereas (1+r)/(1+r*) yields values around 0.5 (when using USD Libor), meaning that the CIP definitely does not hold.
Recap that the lastest rate on the T-bill (1-Month) equals 0.03 and USD libor 0.1992 whereas the Euribor (1-Month) equals 0.112. Also recap that the forward rate (1-month) on EUR/USD is about 1.25 and the spot rate about 1.31.
An explanation could be of course the absence of transaction costs, but does this explain such a large gap? And secondly, if I wanted to calculate the CIP with transaction costs, does anybody know where to get the BID and ASK quotes on the Euribor and Treasury Bill?
In summary: - Which interest rate should I use for Europe and US? - Why is there such a large gap? - Where to get the BID and ASK quotes on the Euribor and T-bill?