Testing uncovered interest rate parity using LIBOR

Muhammad Omer, Jakob de Haan and Bert Scholtens

Applied Economics, 2014, vol. 46, issue 30, 3708-3723

Abstract: We test uncovered interest rate parity (UIP) using London InterBank Offered Rate (LIBOR) interest rates for a wide range of maturities. In contrast to other markets, LIBOR markets have minimal frictions. Whereas most previous studies reject UIP, we find that UIP holds for several short-term LIBOR maturities using block bootstrap panel unit root tests suggested by Palm et al . (2011) and cointegration techniques by Westerlund (2007). Furthermore, the estimation results suggest that the speed of adjustment to the long-run equilibrium marginally differs across the maturity of the underlying instrument, thus supporting the efficient market hypothesis.

Date: 2014
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Working Paper: Testing Uncovered Interest Rate Parity Using LIBOR (2012)
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DOI: 10.1080/00036846.2014.939375

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