Arbitrage, Covered Interest Parity and Cointegration Analysis on the New Taiwan Dollar/US Dollar FOREX Market Revisited

Kuo-Shing Chen, Chien-Chiang Lee () and Chun-Ming Chen
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Kuo-Shing Chen: Shih Chien University, Kaohsiung Campus, 200 University Road Neimen, Kaohsiung 84550, Taiwan,
Chun-Ming Chen: Department of Finance, National Sun Yat-Sen University, Taiwan

International Journal of Economics and Financial Issues, 2017, vol. 7, issue 1, 420-428

Abstract: This study applies interest parity theory including covered interest parity (CIP) to examine the 30-, 60-, 90-, and 180-day maturities for the new Taiwan dollar/US dollar (NTD/USD) foreign exchange (FX) market. In the empirical unit root tests, we find that NTD/USD forward premium and interest rate spread present I(0) property. Empirical results are provided that interest rate differential appears stationary component; imply the stable relationship between Taiwan and USA on monetary policy. Using Taylor (1989)'s covered interest arbitrage model, the empirical results exhibit the absence of excess profit opportunities on new Taiwan dollar (NTD) or US dollar (USD) returns. Additionally, theoretical innovation approach of the cost-of-carry model is considered to evaluate the arbitrage opportunities in FX study. Accordingly, the CIP condition generally continue to hold that almost zero-arbitrage results support FX market efficiency although the Federal Reserve implemented several rounds of quantitative easing after the peak of the 2008 financial crisis. Ultimately, Taiwanese FX market emerges to have been little affected by the increased crisis risks during the turbulent times because of the its limited development and market integration.

Keywords: Covered Interest Parity; Market Integration; Granger Causality Tests; Cost-of-carry Model (search for similar items in EconPapers)
JEL-codes: F32 G1 G12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eco:journ1:2017-01-54

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