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

Jose Gomez-Gonzalez, Santiago Gomez-Malagon (), Luis Melo-Velandia and Daniel Ordoñez-Callamand ()
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Santiago Gomez-Malagon: Banco de la Republica (Central Bank of Colombia)
Daniel Ordoñez-Callamand: Banco de la Republica (Central Bank of Colombia)

Empirical Economics, 2020, vol. 59, issue 1, No 15, 357-369

Abstract: Abstract 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.

Keywords: Covered interest rate parity; Nonparametric rank tests; Cointegration; Time series panel; Cross-currency basis (search for similar items in EconPapers)
JEL-codes: C12 C33 E43 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00181-019-01633-4

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