Risk, Specialization, and Covered-Interest Parity

Previous versions of this paper were circulated with the title "Risk and Specialization in Covered-Interest Arbitrage" and with the title “Quantities and Covered-Interest Parity.” We thank Tristan D’Orsaneo for excellent research assistance. For comments and suggestions, we thank Urban Jermann (the editor), the associate editor, two anonymous referees, our discussants Rashad Ahmed, Valentina Bruno, Will Diamond, Ben Golez, Friederike Niepmann, Piotr Orłowski, Vladyslav Sushko, Stephen Szaura, and Mengbo Zhang, as well as Ricardo Correa, Michele Dathan, Wenxin Du, Nathan Foley-Fisher, Peter Hansen, Claire Husson-Citanna, Toomas Laarits, Jinsook Lee, Borghan Narajabad, Stas Nikolova, Junko Oguri, Aleksei Oskolkov, David Rappoport, Bryan Ricketts, Matt Seay, Alex Vardoulakis, Xiaochuan Xing, Chenzi Xu, Emre Yoldas, and numerous conference and seminar participants. AQR Capital is a global asset manager who may or may not use the insights and methods in this paper. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by members of the Board of Governors of the Federal Reserve System, AQR, their staffs, or of the National Bureau of Economic Research.

• July 17, 2024
• August 19, 2025