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Does Uncovered Interest Rate Parity Hold in Turkey?

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  • Özcan Karahan

    (Department of Economics, Balýkesir University, Balýkesir, Turkey)

  • Olcay Çolak

    (Department of Economics, Rize University, Rize, Turkey)

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    Abstract

    Most of the earlier empirical studies focusing on developed countries failed to give evidence in favor of the Uncovered Interest Rate Parity (UIP). After intensive financial liberalization processes and mostly preferred free exchange rate regimes, a new area of research starts to involve the investigation whether UIP holds for developing economies differently. Accordingly, we tested the UIP for Turkey’s monthly interest rate and exchange rate data between 2002 and 2011. We run conventional regressions in the form of Ordinary Least Squares (OLS) and used a simple Generalized Autoregressive Conditional Heteroskedasticity (GARCH) analysis. The empirical results of both methods do not support the validity of UIP for Turkey. Thus, together with most of the earlier empirical studies focusing on developed countries and detecting the invalidity of UIP, we can argue that the experience of Turkey and developed economies are not different.

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    Bibliographic Info

    Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

    Volume (Year): 2 (2012)
    Issue (Month): 4 ()
    Pages: 386-394

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    Handle: RePEc:eco:journ1:2012-04-2

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    Web page: http://www.econjournals.com

    Related research

    Keywords: Uncovered Interest Rate Parity; OLS; GARCH;

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    References

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    1. Nikolaos Mylonidis & Maria Semertzidou, 2010. "Uncovered interest parity puzzle: does it really exist?," Applied Economics Letters, Taylor & Francis Journals, vol. 17(10), pages 1023-1026.
    2. Tony Cavoli & Ramkishen S. Rajan, 2006. "Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization ," Asian Economic Journal, East Asian Economic Association, vol. 20(4), pages 409-423, December.
    3. Robert Engle, 2001. "GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 157-168, Fall.
    4. Ozgur Aslan & H. Levent Korap, 2010. "Does the uncovered interest parity hold in short horizons?," Applied Economics Letters, Taylor & Francis Journals, vol. 17(4), pages 361-365.
    5. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
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    7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    8. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February.
    9. Alper, C. Emre & Ardic, Oya Pinar & Fendoglu, Salih, 2007. "The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey," MPRA Paper 4079, University Library of Munich, Germany.
    10. Alex Luiz Ferreira, 2004. "Leaning Against the Parity," Studies in Economics 0413, Department of Economics, University of Kent.
    11. Ian Domowitz & Jack Glen & Ananth Madhavan, . "Country and Currency Risk Premia in an Emerging Market," IPR working papers 97-26, Institute for Policy Resarch at Northwestern University.
    12. Liliana Rojas-Suárez & Sebastián Sotelo, 2007. "The Burden Of Debt: An Exploration Of Interest Rate Behavior In Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 25(3), pages 387-414, 07.
    13. Soo Khoon Goh & Guay Lim & Nilss Olekalns, 2006. "Deviations from uncovered interest parity in Malaysia," Applied Financial Economics, Taylor & Francis Journals, vol. 16(10), pages 745-759.
    14. Chinn, Menzie D., 2006. "The (partial) rehabilitation of interest rate parity in the floating rate era: Longer horizons, alternative expectations, and emerging markets," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 7-21, February.
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