The Efficiency of the Polish Zloty Exchange Rate Market: The Uncovered Interest Parity and Fractal Analysis Approaches

The study of the effectiveness of the currency market is one of the most important research problems in the field of finance. The paper aims to assess the efficiency of the Polish zloty exchange rate market. We test the market efficiency by applying two independent approaches, one based on the Uncovered Interest Parity theory, and another based on the fractal analysis of exchange rates series. The research results show that the Uncovered Interest Parity holds only on the USD/PLN market. For EUR/PLN, JPY/PLN, CHF/PLN, MXN/PLN and TRY/PLN, the Uncovered Interest Parity hypothesis is rejected and implies the existence of the forward premium anomaly and market inefficiency. The estimated Hurst coefficient provides insight into the long-range dependence of exchange rates. The MXN/PLN, TRY/PLN and EUR/PLN exchange rates exhibit anti-persistent behaviours suggesting mean-reverting characteristics. For JPY/PLN and CHF/PLN, a high value of the Hurst exponent indicates long memory in the time series. Only for USD/PLN, we achieve the Hurst exponent closest to 0.5, which implies market efficiency. The research results obtained based on the UIP hypothesis and fractal analysis are consistent. The study reveals that the market efficiency hypothesis holds only for the most tradable Polish zloty currency pair, i.e., USD/PLN.

Deviations from the covered interest parity: The role of fundamentals, financial and political turmoil, and market frictions

Recent studies of mature markets on covered interest parity suggest that deviations are mean-reverting, but persistent, particularly after the 2008 crisis (Du et al., 2018). Our study contributes to the literature by modeling the deviations from covered interest rate parity (CIP) of an important emerging-market economy. We focus on Brazilian data, given the importance of its derivative market. One of the strengths of our study is the use of an agnostic approach, based on an automatic model-selection technique that is robust to structural change, the Autometrics algorithm (Hendry and Doornik, 2014), to unveil the possible determinants of CIP deviations from a wide information data set. We show that CIP deviations are highly sensitive to changes in Brazilian federal government total debt, level of reserves, inflation, and degree of trade openness. We also document the existence of instability in the model due to financial and political turmoil. We reach these conclusions based on the algorithm’s intercept correction, which can be seen as a byproduct of our methodology. Finally, we find evidence that, even after correction for fundamentals and instability points, CIP deviations still have persistence, suggesting that market frictions play an important role in the dynamics of CIP deviations.

For Rich or for Poor: When does Uncovered Interest Parity Hold?

For Rich or for Poor: When does Uncovered Interest Parity Hold?

For Rich or for Poor: When does Uncovered Interest Parity Hold?

For Rich or for Poor: When does Uncovered Interest Parity Hold?

Is there Consumer Risk-Pooling in the Open Economy? The Evidence Reconsidered

We revisit the evidence on consumer risk-pooling and uncovered interest parity. Widely used single-equation tests are strongly biased against both. Using the full-model, Indirect Inference test, which is unbiased and has Goldilocks power according to Monte Carlo experiments, we find that both the risk-pooling hypothesis and its weaker UIP version are generally accepted as part of a full world DSGE model. The fact that the risk-pooling hypothesis, with its implication of strong cross-border consumer linkage, has passed this test with generally the highest p-value, suggests that it deserves serious attention from policy-makers looking for a relevant model with which to discuss international monetary and other business cycle policies.

Uncovered Interest Parity and Expected Depreciation in a Dollarized Cambodian Economy

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.