Nonlinearity in the reaction of the foreign exchange market to interest rate differentials: evidence from a small open economy with a long-term peg
AbstractThis article incorporates the Castle and Hendry (2010) portmanteau test into an Exponential Generalized Autoregressive Conditional Hetroscedasticity in Mean (EGARCH-M) model to investigate nonlinearities in the reaction of daily foreign exchange activity to the interest rate differential between the US and Barbados -- a small open economy which has been pegged to the US dollar for over 35 years. The results suggest that changes in the interest differential have a significant and nonlinear effect on the Barbadian foreign exchange market. The linear spread term is positive, and so is in line with a theory of uncovered interest parity for an economy with a fixed exchange rate. But, all other spread coefficients have a negative sign, implying that asymmetry is present. Thus, it is possible that there is a threshold at which foreign currencies no longer conform to the uncovered interest parity condition, but rather are negatively correlated with interest spreads. Finally, these findings were consistent in the pre-financial crisis analysis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 23 (2013)
Issue (Month): 4 (February)
Contact details of provider:
Web page: http://www.tandfonline.com/RAFE20
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Mahalia Jackman, 2012. "Foreign exchange intervention in a small open economy with a long term peg," Economics Bulletin, AccessEcon, vol. 32(3), pages 2207-2219.
- Jackman, Mahalia, 2012. "What Prompts Central Bank Intervention in the Barbadian Foreign Exchange Market?," MPRA Paper 41703, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.