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Covered interest rate parity in emerging markets

  • Skinner, Frank S.
  • Mason, Andrew
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    This paper finds that while covered interest rate parity holds for large and small triple A rated economies, it holds for emerging markets only for a three-month maturity. For a five-year horizon the size and frequency of violations lead to the conclusion that covered interest rate parity does not hold for longer maturities for Brazil, Chile, Russia and South Korea. Overall this paper finds that aspects of credit risk are the source of violations in CIRP in the long-term capital markets rather than transactions costs or the size of the economy.

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    File URL: http://www.sciencedirect.com/science/article/pii/S105752191100069X
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    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 20 (2011)
    Issue (Month): 5 ()
    Pages: 355-363

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    Handle: RePEc:eee:finana:v:20:y:2011:i:5:p:355-363
    DOI: 10.1016/j.irfa.2011.06.008
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620166

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    1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    2. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
    3. Bhar, Ramprasad & Kim, Suk-Joong & Pham, Toan M., 2004. "Exchange rate volatility and its impact on the transaction costs of covered interest rate parity," Japan and the World Economy, Elsevier, vol. 16(4), pages 503-525, December.
    4. Levi, Maurice D, 1977. "Taxation and "Abnormal" International Capital Flows," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 635-46, June.
    5. J. A. Batten & P. G. Szilagyi, 2010. "Is covered interest parity arbitrage extinct? Evidence from the spot USD/Yen," Applied Economics Letters, Taylor & Francis Journals, vol. 17(3), pages 283-287, February.
    6. Henock Louis & Lloyd P. Blenman & Janet S. Thatcher, 1999. "Interest Rate Parity And The Behavior Of The Bid-Ask Spread," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 189-206, 06.
    7. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
    8. Taylor, Mark P, 1989. "Covered Interest Arbitrage and Market Turbulence," Economic Journal, Royal Economic Society, vol. 99(396), pages 376-91, June.
    9. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
    10. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
    11. Nabeel Al-Loughani & Imad Moosa, 2000. "Covered interest parity and the relative effectiveness of forward and money market hedging," Applied Economics Letters, Taylor & Francis Journals, vol. 7(10), pages 673-675.
    12. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2005. "An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps," Journal of Finance, American Finance Association, vol. 60(5), pages 2255-2281, October.
    13. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    14. Naohiko Baba & Frank Packer, 2008. "Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08," BIS Working Papers 267, Bank for International Settlements.
    15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    16. Taylor, Mark P, 1987. "Covered Interest Parity: A High-Frequency, High-Quality Data Study," Economica, London School of Economics and Political Science, vol. 54(216), pages 429-38, November.
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