2
$\begingroup$

I am doing an empirical test of the CIP from the recent financial crisis between Canada and the United States. I am using 1,2,3,6,12 month forwards (monthly data). What interest rates should I use? I don't think T-bills are suitable because you can lend at that rate, but not borrow. Currently I am using LIBOR rates for the US and Canada (even though the Canadian LIBOR was discontinued in 2013 I think it is sufficient). Any feedback would be appreciated.

Thank you.

$\endgroup$
1
$\begingroup$

I believe in the literature they use either the T-bill rate or short term bank deposit rate.

$\endgroup$
  • $\begingroup$ Can you give more details? If you can cite a paper the answer would be much more convincing. $\endgroup$ – Bob Jansen Jun 15 '15 at 6:46
  • 1
    $\begingroup$ In the paper by Spencer Jones: Deviations from CIP during the credit crisis, he uses LIBOR rates, and also rates extracted from Eurodollar futures. $\endgroup$ – noob2 Jun 15 '15 at 18:23
1
$\begingroup$

My personal preference is to use OIS rate for recent years, and LIBOR when OIS isn't available. If neither is available, CB target rate can also be used.

$\endgroup$
  • $\begingroup$ I have considered using OIS rates, but since they are overnight rates, how would you match the OIS maturities with the forward premium maturities? LIBOR is nice in that context because there is no mismatch in maturities. There are overnight, weekly, monthly, bi-monthly, semi annual, and annual LIBOR rates to reflect the forward rates. Would bootstrapping the OIS rates be appropriate? Or make a roll-over assumption? $\endgroup$ – brett Jun 15 '15 at 20:53
  • $\begingroup$ @brett Yes, you should have a complete OIS curve, allowing you to compute matched-maturity OIS rates. $\endgroup$ – Helin Jun 15 '15 at 21:47

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.