A rank approach for studying cross-currency bases and the covered interest rate parity

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Borradores de Economía; No. 994
Date published
2017-05-08
Date of last update
2017-05-08
Author
Ordoñez-Callamand, Daniel
Gómez-González, José Eduardo
Gomez-Malagon, Santiago
Melo-Velandia, Luis Fernando
Document language
eng
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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.
Abstract
We use the recently developed panel rank-cointegration test proposed by Pedroni et al. [2015] to check for the stability conditions of the cross-country money market interest rate bases. Using weekly information on short-term interest rates and spot and forward exchange rates for a set of 20 European economies during 2005-2017, we show that in most cases these bases are non-stationary, implying the failure of the Covered Interest Rate Parity condition. Concretely, a mean-reverting behavior is encountered in only two cases. The first includes Greece, Italy and Portugal, while the second Belgium, France and Germany.
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http://repositorio.banrep.gov.co/handle/20.500.12134/6307
http://hdl.handle.net/20.500.12134/6307
https://doi.org/10.32468/be.994
https://ideas.repec.org/p/bdr/borrec/994.html
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This work is licensed under a Creative Commons Reconocimiento-NoComercial 4.0.This document has been deposited by the author (s) under the following certificate of deposit