Market Structure, Excess Returns in the Foreign Exchange Market and Deviations from Uncovered Interest Parity

Nilufer Ozdemir

International Economic Journal, 2013, vol. 27, issue 4, 587-608

Abstract: This paper contributes to the uncovered interest parity literature by analyzing the role of financial market concentration in determining deviations from the uncovered interest parity condition. The theoretical section of the paper demonstrates that countries with concentrated financial markets will increase their welfare by discouraging financial flows through their manipulation of domestic interest rates. The empirical results support this finding and indicate that the correlation between financial flows and excess returns changes when the concentration ratio is above 0.68. This article suggests that the recent increases in banking sector concentrations around the world are likely to limit international financial flows and this will have welfare implications in countries with concentrated and competitive financial markets.

Date: 2013
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DOI: 10.1080/10168737.2012.708050

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