scholarly journals Uncovered Interest Parity and Expected Depreciation in a Dollarized Cambodian Economy

2021 ◽  
Vol 5 (1) ◽  
pp. p47
Author(s):  
Hay Chanthol
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Serial Correlation ◽  
Rate Increase ◽  
Uncovered Interest Parity ◽  
Currency Depreciation ◽  
Local Currency ◽  
Interest Parity ◽  
Domestic Banks ◽  
Weak Result

This paper tests the Uncovered Interest Parity (UIP) for Cambodian economy using the Generalized Methods of Moment (GMM). GMM method is used to address the weak result of simple OLS method, including the problems of endoneneity, serial correlation, heteroskedasticity. The result showed that, during the period of exchange rate stability, UIP is not valid even the country is a very highly dollarized economy and people can save in both local currency and USD in domestic banks. The UIP coefficient is negative and significant for three-month and six-month interest rates. The negative coefficient suggests that the monetary policy that tries to decrease interest rate (increase) may face the risk of currency depreciation (appreciation). If local currency depreciation is the driving force of dollarization, reducing local interest rate will encourage more dollarization in the economy.

scholarly journals Exchange Rates, Interest Rates, and the Risk Premium

2016 ◽  
Vol 106 (2) ◽  
pp. 436-474 ◽  
Author(s):  
Charles Engel
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Risk Premium ◽  
Uncovered Interest Parity ◽  
Foreign Exchange Risk ◽  
High Interest Rate ◽  
Exchange Risk ◽  
Foreign Exchange Risk Premium ◽  
Interest Parity ◽  
Empirical Regularity

The uncovered interest parity puzzle concerns the empirical regularity that high interest rate countries tend to have high expected returns on short term deposits. A separate puzzle is that high real interest rate countries tend to have currencies that are stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two findings have apparently contradictory implications for the relationship of the foreign-exchange risk premium and interest-rate differentials. We document these puzzles, and show that existing models appear unable to account for both. A model that might reconcile the findings is discussed. (JEL E43, F31, G15)

scholarly journals An Ex-Post Investigation Of Interest Rate Parity In Asian Emerging Markets

2011 ◽  
Vol 6 (2) ◽  
Author(s):  
Bahram Adrangi ◽  
Kambiz Raffiee ◽  
Todd M. Shank
Keyword(s):  
Interest Rate ◽  
Emerging Markets ◽  
Statistical Tests ◽  
Supply And Demand ◽  
The Philippines ◽  
Uncovered Interest Parity ◽  
Interest Rate Parity ◽  
Ex Post ◽  
Interest Parity ◽  
Asian Emerging Markets

This paper investigates the uncovered interest parity theory for the three emerging markets of Korea, the Philippines, and Thailand. The study provides evidence on the efficiency of the currency markets of these economies. In this paper we test for the uncovered interest parity because futures markets for currencies of most emerging markets are not well developed. Furthermore, short- term exchange rate supply and demand are often dominated by the uncovered international investments. Several statistical tests are applied in an attempt to detect evidence of uncovered interest parity. We find there is evidence that the currencies of higher interest rate emerging economies tend to depreciate in the future spot market. However, our test results indicate that this relationship does not support the uncovered interest parity strictly. Arbitrage opportunities remain for a longer periods than predicted by the uncovered interest parity. Furthermore, these abnormal gains are not random and could be predicted by a well designed econometric model. These findings are consistent with empirical findings surrounding uncovered interest parity for mature markets of the world.

Interest Rates and Business Returns

2007 ◽  
Vol 201 ◽  
pp. 4-7
Author(s):  
Martin Weale
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Rate Increase ◽  
Yield Curve ◽  
Current Level ◽  
Short Term ◽  
The Past ◽  
Financial Options ◽  
Very High ◽  
Business Returns

The July interest rate increase has taken the Bank of England's Base Rate to the highest value for six years. In figure 1 we show the forward estimates for the nominal short-term interest rate taken from the Bank of England's yield curve tables for both government debt and liabilities of commercial banks. These are in effect market forecasts of the short-term rate produced in the past. The graph shows that the market has been taken somewhat by surprise by rising short-term interest rates. Two years ago the market was forecasting a rate of around 4 per cent per annum for July 2007. Nor were the probabilities the market gave to an interest rate of 5.75 per cent per annum very high. Twelve months ago the market in financial options implied that the chance of the rate exceeding 5.66 per cent per annum was only 15 per cent. Even in January of this year the chance of it reaching its current level or higher was put at less than 25 per cent. The National Institute cannot claim a substantially better record at forecasting interest rates. We normally use market expectations, as calculated from the yield curve, to provide exogenous forecasts as input into our model in the short term.

scholarly journals Uncovered Interest Parity in Crisis: The Interest Rate Defense in the 1990's

2001 ◽  
Vol 01 (207) ◽  
pp. 1 ◽  
Author(s):  
Andrew K. Rose ◽  
Robert P. Flood ◽  
◽  
Keyword(s):  
Interest Rate ◽  
Uncovered Interest Parity ◽  
Interest Parity ◽  
The Interest Rate

Exchange Rates, Interest Parity, and the Carry Trade

2019 ◽  
Author(s):  
Craig Burnside
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Interest Rates ◽  
Structural Break ◽  
Theoretical Models ◽  
Rate Of Change ◽  
Necessary Condition ◽  
Information Frictions ◽  
High Interest Rate ◽  
Interest Parity

The uncovered interest parity (UIP) condition states that the interest rate differential between two currencies is the expected rate of change of their exchange rate. Empirically, however, in the 1976–2018 period, exchange rate changes were approximately unpredictable over short horizons, with a slight tendency for currencies with higher interest rates to appreciate against currencies with lower interest rates. If the UIP condition held exactly, carry trades, in which investors borrow low interest rate currencies and lend high interest rate currencies, would earn zero average profits. The fact that UIP is violated, therefore, is a necessary condition to explain the fact that carry trades earned significantly positive profits in the 1976–2018 period. A large literature has documented the failure of UIP, as well as the profitability of carry trades, and is surveyed here. Additionally, summary evidence is provided here for the G10 currencies. This evidence shows that carry trades have been significantly less profitable since 2007–2008, and that there was an apparent structural break in exchange rate predictability around the same time. A large theoretical literature explores economic explanations of this phenomenon and is briefly surveyed here. Prominent among the theoretical models are ones based on risk aversion, peso problems, rare disasters, biases in investor expectations, information frictions, incomplete financial markets, and financial market segmentation.

scholarly journals Detection of Breakpoints in Volatility

2020 ◽  
Vol 11 (1) ◽  
pp. 1 ◽  
Author(s):  
Viviana Fernández
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Serial Correlation ◽  
Structural Breaks ◽  
September 11 ◽  
Terrorist Attacks ◽  
Conditional Heteroskedasticity ◽  
Alternative Approaches ◽  
Icss Algorithm

In this article, we test for the presence of structural breaks in volatility by two alternative approaches: the Iterative Cumulative Sum of Squares (ICSS) algorithm and wavelet analysis. Specifically, we look at the effect of the outbreak of the Asian crisis and the terrorist attacks of September 11, 2001 on Emerging Asia. Europe. Latin America and North America's stock markets. In addition, we focus on the behavior of interest rates in Chile after the Central Bank switched its monetary policy interest rate from an inflation-indexed to a nominal target in August 2001. Our estimation results show that the number of shifts detected by the two methods is substantially reduced when filtering out the data for both conditional heteroskedasticity and serial correlation.

Uncovered Interest Rate Parity: The Turkish Evidence

2018 ◽  
Vol 14 (2) ◽  
Author(s):  
Pelin Öge Güney
Keyword(s):  
Interest Rate ◽  
Monetary Economics ◽  
Uncovered Interest Parity ◽  
Interest Rate Parity ◽  
Capital Movements ◽  
Uncovered Interest Rate Parity ◽  
Interest Parity ◽  
Us Dollar ◽  
The Interest Rate ◽  
Turkish Lira

Abstract This paper presents an empirical investigation of the uncovered interest parity (UIP) between the Turkish Lira (TRY)/US Dollar (USD) and Turkish Lira/Euro (EUR). Our results do not provide evidence supporting the UIP hypothesis for either case. Moreover, the estimates imply causality from the TRY/USD exchange rate return to the interest rate differential. Accordingly, the Turkish Central Bank (CBRT) may respond by increasing the domestic interest rate to a depreciation of the TRY against the USD . By taking this type of action, it can be concluded that the CBRT tried to control capital movements. This result supports (McCallum, Bennett T. 1994. “A Reconsideration of the Uncovered Interest Parity Relationship.” Journal of Monetary Economics 33 (1): 105–132.)’s argument, which advances the behavior of the monetary policy as a reason for the failure of the UIP condition.

scholarly journals Problems of estimating the neutral interest rate: conclusions for Ukraine

2021 ◽  
Vol 18 (3) ◽  
pp. 214-228
Author(s):  
Bohdan Danylyshyn ◽  
Ivan Bohdan
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Open Economy ◽  
Open Economies ◽  
Uncovered Interest Parity ◽  
Internal Factors ◽  
Advantages And Disadvantages ◽  
National Bank ◽  
Potential Gdp ◽  
The Relationship

Estimation of the actual and projected level of the neutral interest rate is a central issue in the application of modern monetary theory in the practical context of monetary policy. Views on the role and key drivers of neutral interest rates have evolved over time in parallel with the development of the theory of capital, money, credit and economic growth. Therefore, the paper is aimed at generalizing methods for assessing the neutral interest rate for open economies with emerging markets and formulating recommendations for improving the existing methodological tools for estimating the neutral rate in Ukraine. To achieve this goal, theoretical sources, advisory and research materials of international organizations, central banks and statistical databases were analyzed. It is established that the key issue of the current discussion about the tools for estimating the level of neutral interest rates in countries with small open economies is the relationship between the effects of external and internal factors. The paper identifies the advantages and disadvantages of the method for estimating the level of the neutral rate on the basis of uncovered interest parity rule used by the National Bank of Ukraine within the semi-structural macroeconomic model. The expediency of methodological tools introducing into the practice of monetary regulation of Ukraine for estimating the neutral rate of Ukraine based on the Laubach-Williams approach has been proved with adaptation to the conditions of an open economy, which will consider сinternal factors of economic development – changes in potential GDP and savings.

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