Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets

Abstract

International audienc

Valuing Exhaustible Resource Ownership: General Equilibrium Assets-Markets versus Partial Equilibrium

“…Another limitation of this research is that it does not account for issues such as asymmetric information, uncertainties in resource markets, technological change, and new discoveries. Future research will 14 Exhaustible resources and conservation issues are at the top of the sustainable development agenda [25] …”

Determinants of Foreign Direct Investment in Indonesia “Evidence from Co-Integration and Error Correction Modeling”

“…Interest rate parity (IRP) is a theory that the difference in interest rates between the two countries is the same as the difference between the forward exchange rate and the spot rate parity interest rate plays an important role in the foreign exchange market, linking interest rates, spot exchange rates, and foreign exchange rates. Conditions in which the market will adjust the interest rate with the exchange rate so that there is no possibility of arbitrage so that a balanced state occurs led the interest rate parity [13]. IRP is where an arbitration condition that always adjusts so that there is a level of balance in the international financial markets [14].…”

Long-run equilibrium in international assets and goods markets: Why is the law of one price required?

“…Not all markets behave the same way, however. The integration of financial markets reduces the opportunity for arbitrage, which means interest rate expectations align under the same probability distribution around the globe (Bosi et al (2016)). Goods markets are more heterogeneous.…”

“…1 Again, UIP asserts that any interest rate in currency i equals the sum of the interest rate in currency j and the difference between the exchange rates. 2 In some studies, however, UIP refers to the equalization of returns across countries in expectation, not state by state. To clarify the discussion, Bosi et al (2016) introduce a formal definition of equalization in expectation, referred to as Weak Uncovered Interest (rate) Parity (WUIP): i.e., there exists a common probability distribution, such that the expectations of the returns of the countries are equal.…”

“…This introduces confusion because as people often think that, when UIP is satisfied, the LOP is verified as well: see for instance Lamont et al (2003) and Akram et al (2008). Bosi et al (2016) show that, at equilibrium, UIP implies the LOP if only one consumption good is considered, and that the LOP becomes equivalent to the UIP if, in addition, there is no uncertainty. In the present paper, we consider many consumption goods.…”