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Does the real interest parity hypothesis hold? Evidence for developed and emerging markets

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  • Ferreira, Alex Luiz
  • Leon-Ledesma, Miguel A.

Abstract

Evidence is presented on the Real Interest Parity Hypothesis for a set of emerging and developed countries. This is done by carrying out a set of unit-root tests on the real interest differentials with respect to Germany and the US. Our results support the hypothesis of a rapid reversion towards a zero differeential for developed countries and towards a positive one for emerging markets. An important result is that this adjustment tends to be highly asymmetric and markedly different for developed and emerging countries. Our evidence reveals a high degree of market integratioin for developed countries and highlights the importance of risk premia for emerging markets.
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  • Ferreira, Alex Luiz & Leon-Ledesma, Miguel A., 2007. "Does the real interest parity hypothesis hold? Evidence for developed and emerging markets," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 364-382, April.
  • Handle: RePEc:eee:jimfin:v:26:y:2007:i:3:p:364-382
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    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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