Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7360786 | Journal of Empirical Finance | 2015 | 24 Pages |
Abstract
This paper investigates the dynamic properties of uncovered interest parity (UIP) depending on deviations from covered interest parity (CIP) in a nonlinear panel framework. By employing a panel smooth transition regression model, the threshold level of the CIP deviation in which UIP tends to hold is found to be outside the band of inaction where deviations from CIP would fail to be arbitraged away. This paper shows how reversals of UIP observed during the global financial crisis can be, to some extent, accounted for by funding liquidity constraints. Simulation experiments also suggest that the data-generating process from the nonlinear panel model can produce data consistent with the failure of UIP.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Dooyeon Cho,