Uncovered Interest Parity in Argentina, Brazil, Chile, and Mexico: A Unit Root Test Application With Panel Data

Abstract

The aim of this study was to test uncovered interest parities for Argentina, Brazil, Chile, and Mexico, for the January 1990–December 2001 period, with the use of the rational expectation hypothesis. We also intend to evaluate the degree of mobility of foreign capital in these political jurisdictions, using panel data estimations, with unit root tests proposed by Levin and Lin (1992), and Im, Pesaran and Shin (1997). The econometric results indicate the rejection of uncovered interest parity (UIP), for the period under study, for the group consisting of Argentina, Brazil, Chile, and Mexico. However, the UIP hypothesis is not rejected for the group consisting of Argentina, Chile, and Mexico for the January 1991–December 2000 period.

Testing uncovered interest rate parity using LIBOR

“…Several studies control for frictions originating from the exchange rate side by assuming perfect foresight (Tang, 2010;Bekaert, Wei and Xing, 2007;Chinn and Meredith, 2004;Carvalho, Sachsida, Loureiro and Moreira, 2004 Michaud and Upper (2008) note that the BBA tries to reduce the incentives for such behavior (and to remove quotes that are untypical for other reasons) by eliminating the highest and lowest quartiles of the distribution and averaging the remaining quotes.…”