IDEAS home Printed from https://ideas.repec.org/a/ris/ecoint/0413.html
   My bibliography  Save this article

Testing the Effectiveness of Arbitrage and Speculation under Flexible Exchange Rates

Author

Listed:

Abstract

This paper presents some empirical evidence on the traditional covered interest parity theory and the modem theory of forward exchange under the current system of floating exchange rates. It is argued that reintegration analysis is more appropriate for testing these theories and that it is erroneous to test the restrictions implied by these theories on the basis of the conventional standard errors and t statistics. One specification of the former and two specifications of the latter are estimated using an expectations formation mechanism that is a special case of rational expectations. The results favour the traditional covered interest parity theory, giving almost all the weight to arbitrage and almost nothing to speculation in the determination of the forward exchange rate. These results are consistent with the proposition that financial deregulation, abolition of capital controls and the integration of financial markets have created an ideal environment for the operation of covered interest parity.

Suggested Citation

  • Moosa , Imad A. & Bhatti, Razzaque H., 1994. "Testing the Effectiveness of Arbitrage and Speculation under Flexible Exchange Rates," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 47(4), pages 392-408.
    • Handle: RePEc:ris:ecoint:0413
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:ecoint:0413. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Angela Procopio (email available below). General contact details of provider: https://edirc.repec.org/data/cacogit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.