Liquidity, covered interest rate parity, and zero lower bound in Japan’s foreign exchange markets

W.D. Chen

International Review of Economics & Finance, 2020, vol. 69, issue C, 334-349

Abstract: This research investigates the effect of an unconventional monetary policy, in which we focus on capital liquidity, especially when interest rates enter negative territory. Through covered interest rate parity (CIP), we look to detect how foreign exchange (FOREX) markets are exposed to liquidity risk. With an illustration via Japan’s market, this study applies a dynamic equilibrium model to show how policy change sensitivity affects market efficiency.

Keywords: Covered interest rate parity; Dynamic equilibrium model; Serial correlation; Panel data; Modified ordinary least squares (search for similar items in EconPapers)
JEL-codes: C23 C52 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:69:y:2020:i:c:p:334-349

DOI: 10.1016/j.iref.2020.05.007

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