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Covered Interest Rate Parity: The Case of the Czech Republic

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  • Bednarik, Radek

Abstract

This paper tries to find out, whether the Covered Interest Rate Parity (CIRP) theory was valid for exchange rate CZK/EUR during the period ranging from May 2001 to November 2007. As a main tool, a common OLS regression was chosen. It was augmented by MA(1) process of residuals and by ARCH (6) model of residuals’ variance. The results show, that the CIRP theory was not valid during selected period. However, it seems apparent, that the main factors for 3-month forward exchange rate CZK/EUR determination were an interest rate differential and a nominal spot exchange rate. This is fully consistent with the CIRP theory.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14696.

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Date of creation: 05 Jan 2008
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Handle: RePEc:pra:mprapa:14696

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Keywords: Covered interest rate parity; exchange rate; interest rate; foreign exchange markets;

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