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Exchange rate Volatility and Interest rate Risk: In the case of Pakistan

Author

Listed:
  • Hussain, Adnan
  • Mubin, Muhammad
  • Lal, Irfan

Abstract

The study examines the effects of volatility of exchange rate volatility on interest rates and inflation. For this purpose the study used monthly data over the period January 1990 to December 2010. To explore the volatility of exchange rate study used the ARCH (Auto Regressive Conditional Heterosidasticity) and GARCH (Generalized Auto regressive conditional Heterosidasticity). The result shows that positive association between exchange rate risk and interest rate in the form risk premia. The result of the study fulfills the interest parity condition and purchasing power parity.

Suggested Citation

  • Hussain, Adnan & Mubin, Muhammad & Lal, Irfan, 2011. "Exchange rate Volatility and Interest rate Risk: In the case of Pakistan," MPRA Paper 106877, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106877
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    File URL: https://mpra.ub.uni-muenchen.de/106877/1/MPRA_paper_106877.pdf
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    References listed on IDEAS

    as
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    3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    4. Mohammad, Sulaiman D. & Lal, Irfan, 2010. "The Euro Dollar Exchange Rate & Pakistan Economy," MPRA Paper 106865, University Library of Munich, Germany.
    5. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-622, September.
    6. Akcay, O. Cevdet & Alper, C. Emre & Karasulu, Meral, 1997. "Currency substitution and exchange rate instability: The Turkish case," European Economic Review, Elsevier, vol. 41(3-5), pages 827-835, April.
    7. David M. Gould & Steven B. Kamin, 1999. "The impact of monetary policy on exchange rates during financial crises," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    8. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Exchange rate volatility; ARCH; GARCH;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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