Empirical Investigation of Covered Interest Rate Parity in Developed and Emerging Markets

Sener, Emrah; Satiroglu, Sait; Yıldırım, Yıldıray

doi:10.2139/ssrn.2096222

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Covered Interest Rate Parity1

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2019

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“…The C.I.P. condition is thus a simple no-arbitrage condition (Sener et al 2011). It is also central in understanding financial markets, international trade and monetary policy (Fong et al 2010).…”

Section: Covered Interest Rate Paritymentioning

confidence: 99%

Does the covered interest rate parity fit for China?

Wang

Tao

et al. 2019

Economic Research-Ekonomska Istraživanja

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This paper aims to investigate whether the covered interest rate parity (C.I.P.) holds or not through examining the dynamic link between nominal interest rate differential (N.I.R.D.) and nominal exchange rate (N.E.R.) in China. With economic transitions and structural changes existing, we find that the C.I.P. condition using full-sample data does not always hold. Consequently, we apply a time-varying rolling-window approach to revisiting the dynamic causal relationship, and the results show that N.I.R.D. has both positive and negative impacts on N.E.R. in several sub-periods, and in turn, N.E.R. has the same effects on N.I.R.D. for China. Exchange regime reform, currency-specific market risk and capital control are considered in explaining the deviations in some subsample periods. Therefore, empirical results have important implications for distinguishing factors that bring about the C.I.P. deviations and further offers policy suggestions for the Chinese monetary authority.

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Section: Covered Interest Rate Paritymentioning

confidence: 99%