ISSN:
1435-8921
Keywords:
Key words: Covered interest parity
;
impulse response
;
threshold autoregression
;
JEL classification: F31
;
G15
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract. This paper examines the dynamics of deviations from covered interest parity using daily data on the UK/US spot, forward exchange rates and interest rates over the period January 1974 to September 1993. Like other studies we find a substantial number of instances during the sample in which the covered interest parity condition exceeds the transaction costs band, implying arbitrage profit opportunities. While most of these implied profit opportunities are relatively small, there is also evidence of some very large deviations from covered interest parity in the sample. In order to examine the persistence of these deviations, we estimated a threshold autoregression in which the dynamics behavior of deviations from covered interest parity is different outside the transaction costs band than inside them. We find that while the impulse response functions when inside the transaction costs band are nearly symmetric, those for the outside the bands are asymmetric-suggesting less persistence outside of the transaction costs band than inside the band.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/s001810050035
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