Analysis of Arbitrage Anomaly in the Won/Dollar Exchange Market: An Empirical Investigation and Policy Implications

Ryoo, Sang Dai

Korean Journal of Financial Studies 2011;40(1):195-218.
Published online February 28, 2011.

Sang Dai Ryoo

금리차익거래 유인 분석

유상대

Abstract

This paper is the result of efforts to examine policy implications of arbitrage anomalies in the won/dollar exchange market. The major findings are as follows. First, Korea FX market suffered structural change with the global financial turmoil in 2008. Second, arbitrage anomalies cannot be said to persist systematically in the long run, even though interest rate parity (CIP) failed to hold occasionally for a while. Third, FX market was not much efficient at the period before the global financial crisis. Therefore, enhancing FX market efficiency remains most important in line with increasing exposures to global financial markets. As the arbitrage opportunity may narrow down, long-term foreign investors are expected to be increasingly important for Korea markets with current global financial situations. The authorities may play an important role in FX money market, in the case that arbitrage anomalies are persistent further, particularly due to external reasons. It is also needed preparing for the design and implementation of macro-prudential measures to curb excessive capital inflows.

Key Words: 금리차익거래,스왑시장,시장효율성,외환정책,자본통제,Arbitrage Anomaly,FX Policy,FX Swap Market,Macro-prudential Measures,Market Efficiency