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Liquidity, covered interest rate parity, and zero lower bound in Japan’s foreign exchange markets

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  • Chen, W.D.

Abstract

This research investigates the effect of an unconventional monetary policy, in which we focus on capital liquidity, especially when interest rates enter negative territory. Through covered interest rate parity (CIP), we look to detect how foreign exchange (FOREX) markets are exposed to liquidity risk. With an illustration via Japan’s market, this study applies a dynamic equilibrium model to show how policy change sensitivity affects market efficiency.

Suggested Citation

  • Chen, W.D., 2020. "Liquidity, covered interest rate parity, and zero lower bound in Japan’s foreign exchange markets," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 334-349.
    • Handle: RePEc:eee:reveco:v:69:y:2020:i:c:p:334-349
    DOI: 10.1016/j.iref.2020.05.007
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    More about this item

    Keywords

    Covered interest rate parity; Dynamic equilibrium model; Serial correlation; Panel data; Modified ordinary least squares;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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