Long-Run Implications of the Covered Interest Rate Parity Condition: Evidence during the Recent Crisis and Non-Crisis Periods
AbstractThis paper analyzes the stationarity of forward premiums in foreign exchange markets. Considering a wide range of countries and contract periods and taking into account cross-sectional correlations and heterogeneities in nonstationary environments, we con�rmed mixed evidence of stationary forward premiums. Further analysis suggests that the nonstationary element has been attributable to regime shifts which are closely associated with the effects of the Lehman Shock and changing monetary policies. These effects can be captured by interest rates, leaving the covered interest parity condition as a valid economic concept at least in the long-run.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 41566.
Date of creation: 01 Sep 2012
Date of revision:
Panel unit root tests; structural shifts; forward premiums; Lehman shock;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-06 (All new papers)
- NEP-FDG-2012-10-06 (Financial Development & Growth)
- NEP-IFN-2012-10-06 (International Finance)
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