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Does the Real Interest Parity Hypothesis Hold? Evidence for Developed and Emerging Markets

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  • Alex Luiz Ferreira

    ()

  • Miguel León-Ledesma

    ()

Abstract

Evidence is presented on the Real Interest Parity Hypothesis for a set of emerging and developed countries. This is done by carrying out a set of unit-root tests on the real interest differentials with respect to Germany and the US. Our results support the hypothesis of a rapid reversion towards a zero differeential for developed countries and towards a positive one for emerging markets. An important result is that this adjustment tends to be highly asymmetric and markedly different for developed and emerging countries. Our evidence reveals a high degree of market integratioin for developed countries and highlights the importance of risk premia for emerging markets.

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Bibliographic Info

Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0301.

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Date of creation: Aug 2003
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Handle: RePEc:ukc:ukcedp:0301

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
Web page: http://www.ukc.ac.uk/economics/

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Keywords: Real Interest Rate Differentials; Market Integration; Unit Roots; Asymmetric Adjustment;

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