The uncovered interest rate parity anomaly and trading activity by non-dealer financial firms

John F. Boschen and Kimberly J. Smith

International Review of Economics & Finance, 2016, vol. 45, issue C, 333-342

Abstract: Since the 1990s there has been a substantial increase in foreign exchange market trading by non-dealer financial firms. Non-dealer financial firms comprise a market segment that includes hedge funds and mutual funds, among others. We investigate whether the growth of non-dealer financial firm trading affected the uncovered interest rate parity (UIP) anomaly, a phenomenon that seems to offer opportunities for excess returns. We find that the growth in trading volume by non-dealer financial firms is associated with some mitigation in the UIP anomaly. In contrast, growth in dealer-to-dealer and dealer-to-nonfinancial firm trading volume has no impact on the anomaly.

Keywords: Uncovered interest rate parity; Exchange rates; Foreign exchange markets; Electronic trading; Carry trade (search for similar items in EconPapers)
JEL-codes: F31 F33 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:45:y:2016:i:c:p:333-342

DOI: 10.1016/j.iref.2016.05.006

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