Asymmetric arbitrage and default premiums between the U.S. and Russian financial markets

Deviations from covered interest rate parity (CIP) and from a generalized form of CIP involving forward-forward arbitrage between the Russian Treasury bill (GKO) market and the U.S. Treasury bill market are modeled nonlinearly. We find a no-arbitrage band within which deviations are random, outside of which deviations revert to the edge of the band. The band is asymmetric implying that small profit margins trigger arbitrage into the dollar, but large profit margins are needed to trigger arbitrage into the ruble. The bandwidth rises and the speed of mean reversion falls as the maturity increases. The findings are consistent with the existence of Russian default premiums.