Various factors may give rise to arbitration opportunities in times of crisis. Since many dependencies involving no arbitration include unsecured derivative positions in the OTC market, the risk of the counterparty can make arbitration risky, so if it does appear in the market, participants may be less likely to benefit from such arbitration opportunities. Besides, the IMF estimates that the increase in arbitrage opportunities is due to liquidity problems. "Several studies suggest that liquidity problems may have been the main reason for the increase in arbitrage opportunities. Market participants who profit from such arbitrage operations refrain from recruiting large positions because of growing uncertainty about the value of assets or because of the inability to quickly find the necessary amount of liquidity. In turn, the amount of potential arbitrage profit or the amount of deviation from the "one price" rule increases in such conditions. At the same time, the IMF experts noted that such arbitrage "deviations" from the principle of covered interest parity could become an indicator of liquidity problems in the market and even suggested that the world's Central Bank include this indicator in the list of monitored indicators.
The crisis of 2008, indeed, significantly increased the amount of arbitrage profit on the principle of covered interest parity, according to the results of the study of the Bank for International Settlements. At the same time, this situation was observed not in individual cases, but among a large number of banks in the EU and the U.S. The results of research by Frank Pecker from the Bank for International Settlements confirmed the hypothesis that many banks in the EU and the USA in 2008-2009 became more sensitive to counterparty risk. At the same time, access to the FRS dollar liquidity by the banks included in the "Libor panel" at that time was much higher than by other credit institutions. At the same time, the authors of the study compared the liquidity crisis at the time of the global economic crisis of 2008 with the crisis period of the Asian crisis of the late 1990s. The results show a similar dynamics of arbitrage profits in these two periods. In particular, in the late 1990s, due to a significant deterioration in the creditworthiness of Japanese banks compared to banks in other developed countries, it was extremely difficult for Japanese banks to borrow dollars in the global foreign exchange market. A so-called Japanese premium, paid by Japanese banks, emerged. Some studies have suggested that Japanese banks have then turned to currency swaps to obtain funding in dollars, which has led to significant deviations from covered interest parity in its traditional sense. Such deviations in the currency market were triggered by the uncertainty and volatility that prevailed in the market at the time.
In 2008, Japanese banks were also affected by the liquidity crisis and deviations from the covered interest rate parity increased. One of the main conclusions of a study by the University of Tokyo is that there is a serious shortage of dollar liquidity in Tokyo banks at a time when the market is closed in New York. Given the size of the Japanese economy, the role of the Tokyo market as a financial center has remained large over the past decades. However, in Japan, international transactions are still heavily dependent on the US dollar. For example, more than 70% of Tokyo's currency turnover was the US dollar, not the Japanese yen or euro. The liquidity of the Central Bank can be an important tool to reduce the risk of liquidity in U.S. dollars transactions, the study noted. Thus, the increased demand for liquidity on the part of banks during the crisis periods may become a signal that the market may observe an increase in deviation from the interest rate parity. In addition to the volatility in the foreign exchange market, this factor will also be considered in more detail in the practical study of arbitration opportunities in the Russian market.
A study by Johnnathan Butten and Peter Szilaggya concludes that during the Asian crisis in the 1990s, arbitrage profits at covered interest rates were higher than before and after the crisis. The study sample included data on dollar/yen instruments over 25 years.
However, arbitrage profits were observed throughout the sample for those years, which were higher during the Asian crisis and decreased after 2000. The researchers used 1.3.6 and 12-month dollar/yen forwards daily from 1983 to 2005. Using the GARCH (Generalized Autoregressive Contingent Heteroscedasticity) volatility model, the researchers concluded that, in addition to the volatility of the dollar/yen pair, the arbitrage profits were positively influenced by lower spot prices, higher dollar rates, and lower yen rates. However, these figures were noticeably volatile during the 1996-98 Asian crisis.