Deviations From Covered Interest Rate Parity: Evaluating Drivers for Changes

Tests of Covered Interest Rate Parity

ECEN’FLY there has been considerable interest in and investigations of whether the covered interest parity (CIP) holds. At the inicroeconomic level, CIP is important because is it a direct consequence of covered interest arbitrage. Its failure to hold would suggest 1) that markets are inefficient in the sense that traders do not take advantage of known profit opportunities, 2) that legal restri...

Deviations from Uncovered Interest Rate Parity: A Post Keynesian Explanation

Testing Uncovered Interest Rate Parity Using LIBOR

We test Uncovered Interest Parity (UIP) using LIBOR interest rates for a wide range of maturities. In contrast to other markets, LIBOR markets have minimal frictions which could lead to rejecting UIP. Using panel unit root test suggested by Palm, Smeekes, and Urbain (2010) and cointegration techniques by Westerlund (2007), we find that UIP holds for shortterm maturities, when market-specific he...

A Dynamic Trading Strategy Approach to Deviations from Uncovered Interest Parity

Foreign exchange predictability is explored from the standpoint of generating explicit dynamic strategies. These are used to assess the economic significance and economic magnitude of the predictability present in exchange rates. It is found that considering the true out of sample behavior of certain dynamic foreign exchange strategies greatly reduces the magnitude of previously reported puzzle...

Confidence intervals for half-life deviations from Purchasing Power Parity

According to Rogoff (1995), Purchasing Power Parity (PPP) fits well one empirical feature of the data, namely the high short-run volatility of real exchange rates, but also implies that shocks should die away in one to two years (the time interval compatible with price and wage stickiness). However, existing point estimates of half-life deviations from PPP are in the order of 3 to 5 years. This...