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

We use a panel rank cointegration approach to check for the stability conditions of the cross-country money market interest rate basis. Using weekly information on short-term interest rates and spot and forward exchange rates for a set of 20 European economies between 2005 and 2017, we show that in...

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Bibliographic Details
Published in:Empirical economics 2020-07, Vol.59 (1), p.357-369
Main Authors: Gomez-Gonzalez, Jose E., Gomez-Malagon, Santiago, Melo-Velandia, Luis F., Ordoñez-Callamand, Daniel
Format: Article
Language:English
Subjects:
Econometrics
Economic models
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Finance
Foreign exchange rates
Forward exchange
Insurance
Interest rate parity theorem
Interest rates
Management
Money markets
Nonparametric statistics
Statistics for Business
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Summary:We use a panel rank cointegration approach to check for the stability conditions of the cross-country money market interest rate basis. Using weekly information on short-term interest rates and spot and forward exchange rates for a set of 20 European economies between 2005 and 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.
ISSN:0377-7332
1435-8921
DOI:10.1007/s00181-019-01633-4