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Testing Uncovered Interest Parity for Structural Breaks: A Developing Country Perspective

In: Economic Crisis, Development and Competitiveness in Southeastern Europe

Author

Listed:
  • Srđan Marinković

    (University of Niš)

  • Ognjen Radović

    (University of Niš)

  • Željko Šević

    (University of Wales Trinity Saint David)

Abstract

This article is a single-country empirical study of uncovered interest parity. Uncovered interest parity (hereafter UIP) is a non-arbitrary condition well-known and widely tested in international finance. This test of UIP is based on high-frequency data. The most promising parts of the evidence are the EGARCH analysis of statistical properties of time series of deviations from UIP, and the Markov Switching model. EGARCH (1,1) delivers a model able to predict future volatility of the tested variable. Moreover, the model also describes the time-varying nature of volatility itself. The changing nature of volatility may arise due to the process of information arrivals or being liquidity driven, but can also be a consequence of some structural breaks. Namely, the time series remains homoscedastic in the short-term while heteroscedasticity appears in long-term horizons. The regime switching model is further employed in order to test if the smoothed probabilities along the sample reflect the main events through which the economy evolved over time. The model proved to be able to indicate correctly the ex-ante identified structural break that came from crisis incident, but failed to differ between pre- and post-liberalisation periods.

Suggested Citation

  • Srđan Marinković & Ognjen Radović & Željko Šević, 2016. "Testing Uncovered Interest Parity for Structural Breaks: A Developing Country Perspective," Contributions to Economics, in: Anastasios Karasavvoglou & Dimitrios Kyrkilis & Georgios Makris & Persefoni Polychronidou (ed.), Economic Crisis, Development and Competitiveness in Southeastern Europe, pages 121-137, Springer.
    • Handle: RePEc:spr:conchp:978-3-319-40322-9_8
    DOI: 10.1007/978-3-319-40322-9_8
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    More about this item

    Keywords

    F31; F36; E43;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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