Deviations from covered interest rate parity and capital outflows: The case of Switzerland
Albi Tola, Miriam Koomen and Amalia Repele
F31, F32, G11, G15
Covered interest rate parity, cross-currency basis, dollar funding, capital flows, portfolio investments
We investigate the relationship between deviations from the covered interest rate parity (CIP) and Swiss capital outflows since the great financial crisis. While the CIP held tightly before the crisis, it has been failing for most currencies vis-à-vis the US dollar ever since. We expect CIP deviations to adversely affect outflows, as they generally result in additional costs for Swiss investors. We find empirical support for our hypothesis. Our results show that with increasing CIP deviations, Swiss portfolio investment debt outflows decrease significantly. This decrease could have implications for the demand for domestic currency investments.