An Ex-Post Investigation Of Interest Rate Parity In Asian Emerging Markets

Abstract

This paper investigates the uncovered interest parity theory for the three emerging markets of Korea, the Philippines, and Thailand. The study provides evidence on the efficiency of the currency markets of these economies. In this paper we test for the uncovered interest parity because futures markets for currencies of most emerging markets are not well developed. Furthermore, short- term exchange rate supply and demand are often dominated by the uncovered international investments. Several statistical tests are applied in an attempt to detect evidence of uncovered interest parity. We find there is evidence that the currencies of higher interest rate emerging economies tend to depreciate in the future spot market. However, our test results indicate that this relationship does not support the uncovered interest parity strictly. Arbitrage opportunities remain for a longer periods than predicted by the uncovered interest parity. Furthermore, these abnormal gains are not random and could be predicted by a well designed econometric model. These findings are consistent with empirical findings surrounding uncovered interest parity for mature markets of the world.

Macroeconomic Implications of Exchange Rate Depreciation: The Nigerian Experience

“…The irp states that the difference between interest rates in two countries is the difference between the future rate and the current rate of their currencies (Adrangi, Raffiee, and Shank 2007;Cherop and Changwony 2014;Lo and Morley 2015). The theory states that real interest rates should be equalized across countries under fully liberalized financial markets without government interventions and capital controls (Chang and Su 2015).…”

A Survey of Exchange Rate Fluctuation on Tea Export Earnings among Smallholder Tea Factories in Kenya

“…Interest Rate Parity is an economic theory based on interest rates and exchange rates, stating that the difference between interest rates in two countries is the difference between the forward (future) rate and the spot (current) rate of their two currencies (Adrangi et al, 2007). If this parity or equilibrium is broken, then arbitrage exists resulting in a risk-free return (Edison, 1987).…”

“…Uncovered interest rate parity assumes that the difference between the interest rates of two currencies will equal the predicted depreciation of a currency (Clinton, 1988). Adrangi et al (2007) found out that uncovered IRP does not exist in any of the three Asian emerging markets-Korea, Philippines and Thailand -tested for the post-1990 periods. They also found evidence that the currencies of higher interest rate among emerging economies tend to depreciate in the forward market.…”

“…However, their test results indicated that this relationship does not support the uncovered interest parity strictly and the currency markets in these nations are not fully efficient. Arbitrage opportunities remain for a longer periods than predicted by the uncovered interest parity (Adrangi et al, 2007).…”

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“…The irp states that the difference between interest rates in two countries is the difference between the future rate and the current rate of their currencies (Adrangi, Raffiee, and Shank 2007;Cherop and Changwony 2014;Lo and Morley 2015). The theory states that real interest rates should be equalized across countries under fully liberalized financial markets without government interventions and capital controls (Chang and Su 2015).…”