Title: An empirical investigation of covered interest rate parity: the case of the GBP/USD and SEK/USD exchange rates

Authors: Stephanos Papadamou; Evangelia Theodosiou

Addresses: Department of Economics, University of Thessaly, 28th October 78, 38333 Volos, Greece ' Department of Economics, University of Thessaly, 28th October 78, 38333 Volos, Greece

Abstract: The paper examines empirically a well-established relationship between forward premium and interest rate differential in international finance, covered interest rate parity (CIP). More specifically, a cointegration-based approach is employed to test CIP in two different exchange rates against USD, namely GBP/USD and SEK/USD, by using monthly data and Euro rates for a period of almost 15 years. Findings suggest the validity of CIP in the case of GBP/USD for both three-month and six-month maturities. On the contrary, the empirical analysis of SEK/USD does not provide any evidence for accepting the theoretical framework. An important point is that research presents the existence of systematic, small-scale deviations from parity, a finding that can be attributed to the modelling of transaction costs.

Keywords: covered interest rate parity; CIP; GBP/USD; SEK/USD; Johansen's co-integration approach.

DOI: 10.1504/IJFERM.2019.101295

International Journal of Financial Engineering and Risk Management, 2019 Vol.3 No.2, pp.114 - 129

Received: 02 Oct 2018
Accepted: 12 Mar 2019
Published online: 30 Jul 2019 *

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