Testing uncovered interest rate parity using LIBOR

Omer, Muhammad; Haan, Jakob de; Scholtens, Bert

doi:10.1080/00036846.2014.939375

Cited by 4 publications

(4 citation statements)

References 65 publications

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“…1. There is a vast literature on both PPP and UIP hypothesis independently. Some of the recent studies on PPP and UIP include Tang (2011), Omer et al (2014), He et al (2014), Bhatti (2014), Chang and Su (2015), among others.…”

Section: Notesmentioning

confidence: 99%

Testing deviations from PPP and UIP: evidence from BRICS economies

Prabheesh

Garg²

2020

SEF

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Purpose This paper aims to investigate the interrelations between purchasing power parity (PPP) and uncovered interest parity (UIP) in BRICS economies, namely, Brazil, Russia, India, China and South Africa, by checking the validity of the capital-enhanced equilibrium exchange rate (CHEER) approach. Further, this study tests whether the CHEER results are data frequency-dependent. Design/methodology/approach The present study uses monthly data ranging from 1997M01 to 2016M12 and considers the US economy as the representative foreign country. The study uses structural break unit root test and structural break cointegration technique to test the presence of economic relationships between nominal exchange rates and each of the price and interest rate differentials. Then, the study examines the validity of the CHEER approach by testing the appropriate theoretical restrictions. Findings The cointegration results suggest the existence of two cointegrating vectors representing UIP and PPP conditions. For all countries, the data appear to support the hypothesis that the system contains UIP and PPP relations. However, each of the international parity hypotheses is strongly rejected when formulated in isolation and jointly, leading to repudiation of the CHEER validity. Further, it is found that the results are data frequency-dependent and suggest that higher frequencies should be used as they provide additional information. Originality/value First, the literature on equilibrium exchange rates in BRICS economies is scanty. BRICS economies are large-emerging economies and one of the fastest growing economies and thus entail an empirical enquiry on their exchange rates. Second, the empirical application has mainly used monthly data to test the validity of the CHEER approach. However, data frequencies could affect the results. To the best of the authors’ knowledge, this study is the first to check data frequency-dependency in examination of the CHEER approach.

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Section: Notesmentioning

confidence: 99%

Testing deviations from PPP and UIP: evidence from BRICS economies

Prabheesh

Garg²

2020

SEF

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“…This paper therefore uses SUR with integrated regressors as proposed by Moon and Perron (2005). More recently, Omer et al (2014), and Ismailov and Rossi (2018) tested UIP over a short horizon for advanced economies. Precisely, Omer et al (2014) has tested uncovered interest rate parity (UIP) using LIBOR interest rates by controlling the cross currency correlation similar to this study.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Their estimates, as discussed by these authors, were aggregate in the sense that the bilateral relationships between the currencies could not be explored due to procedural limitations. This study, is therefore an extension of Omer et al (2014), and estimates beta coefficients for the individual currencies in a correlated currency environment by adopting a more suitable procedure proposed by Moon and Perron (2005).…”

Section: Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Does Uncovered Interest Rate Parity Hold After All?

Omer

Haan²,

Scholtens³

2019

LJE

Self Cite

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This paper tests Uncovered Interest Rate Parity (UIP) using LIBOR rates for six major international currencies for the period January 2001 to December 2008. We find that UIP generally holds over a short-term (above 5-months) horizon for individual as well as groups of currencies. Our results suggest that it is important to consider the cross-correlation between currencies. We also find that “state dependence” plays an important role for currencies with a negative interest rate differential vis-à-vis the US dollar. This state dependence could also be instrumental in explaining exchange rate overshooting.

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Testing the Interest Rate Parity and Efficient Market Hypothesis for Emerging Market Economies

Mike

2018

Eskişehir Osmangazi Üniversitesi İktisadi Ve İdari Bilimler Dergisi

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In this study, the long-run validity of the interest rate parity and efficient market hypothesis is tested for quarterly periods 2003Q1-2015Q4 for 14 emerging market economics. Time series and panel data analysis were applied for the interest rate parity model which uncovered version was used. And time series analysis were applied for the efficient market hypothesis which semi-strong form was used. Findings from the current study showed us that interest rate parity, that explaining the relationship between interest rate and exchange rate and reflect the asset market conditions, and efficient market hypothesis does not hold for these countries. This leads to reduction in the foreseeability of exchange rates due to the negative effects of global financial markets that changes in macroeconomic policies of emerging market economies.

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Testing uncovered interest rate parity using LIBOR

Cited by 4 publications

References 65 publications

Testing deviations from PPP and UIP: evidence from BRICS economies

Testing deviations from PPP and UIP: evidence from BRICS economies

Does Uncovered Interest Rate Parity Hold After All?

Testing the Interest Rate Parity and Efficient Market Hypothesis for Emerging Market Economies

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