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.
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: 24 Jul 2019 *