EconPapers    
Economics at your fingertips  
 

Nonlinearity in the reaction of the foreign exchange market to interest rate differentials: evidence from a small open economy with a long-term peg

Mahalia Jackman, Roland Craigwell and Michelle Doyle-Lowe

Applied Financial Economics, 2013, vol. 23, issue 4, 287-296

Abstract: This article incorporates the Castle and Hendry (2010) portmanteau test into an Exponential Generalized Autoregressive Conditional Hetroscedasticity in Mean (EGARCH-M) model to investigate nonlinearities in the reaction of daily foreign exchange activity to the interest rate differential between the US and Barbados -- a small open economy which has been pegged to the US dollar for over 35 years. The results suggest that changes in the interest differential have a significant and nonlinear effect on the Barbadian foreign exchange market. The linear spread term is positive, and so is in line with a theory of uncovered interest parity for an economy with a fixed exchange rate. But, all other spread coefficients have a negative sign, implying that asymmetry is present. Thus, it is possible that there is a threshold at which foreign currencies no longer conform to the uncovered interest parity condition, but rather are negatively correlated with interest spreads. Finally, these findings were consistent in the pre-financial crisis analysis.

Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1080/09603107.2012.718063 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apfiec:v:23:y:2013:i:4:p:287-296

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603107.2012.718063

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

 
Page updated 2020-12-04
Handle: RePEc:taf:apfiec:v:23:y:2013:i:4:p:287-296