This project examines in the first part the covered and uncovered interest parity between US dollar and Swiss Franc. We present simple summary statistics, unit root tests, deviations from covered interest parity, regression analysis, threshold autoregression and exponential transition autoregression. Then we present the uncovered interest parity and, as in the case of covered interest parity, we apply some tests to examine if it’s valid. We apply Johansen cointegration tests between spot and forward rates, but also between forward premia and interest rates differentials and we test if there is a cointegration equation and we estimate the vector error correction model. After this procedure we present the impulse responses. Next we test if there is a threshold cointegration relation between the above variables. Finally in the last section we apply a dynamic OLS (DOLS) estimation with Newey-West HAC standard errors.
In the second part the purchasing power parity (PPP) hypothesis is examined with a similar methodology followed, where additionally we present a long span study, unit root tests allowing for structural breaks in data, panel unit root tests as also Markov switching regime autoregressive model is examined in the category of the non linear models
Inhaltsverzeichnis (Table of Contents)
- PART 1: COVERED AND UNCOVERED INTEREST RATE PARITY
- Introduction
- Literature Review
- Data
- Summary Statistics
- Random Walk
- Unit Root and Stationary Tests
- Covered Interest Rate Parity
- Linear Tests
- Non-Linear Tests
- Threshold Autoregressive (TAR) Model
- Smoothing Transition Autoregressive (STAR) Models
- Uncovered Interest Rate Parity
- Vector Error-Equilibrium Correction Model (VECM)
- Impulse Responses
- Threshold Vector Error Correction Model
- Dynamic OLS (DOLS)
- Conclusions
- PART 2: PURCHASING POWER PARITY HYPOTHESIS
- Introduction
- Literature Review
- Data
- Summary Statistics
- Unit Root and Stationary Tests
- Purchasing Power Parity Tests
- Linear Tests
- Cointegration Tests
- Panel Unit Root Tests
- Long Span Tests
- Non-Linear Tests
- Threshold Autoregressive Model (TAR)
- Smoothing Transition Autoregressive Models (STAR)
- Markov Two-Regime Switching Model
- Conclusions
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This research project examines the Covered Interest Rate Parity (CIP) and Purchasing Power Parity (PPP) hypotheses, applying various econometric techniques to assess their validity. The study uses data on the US dollar and Swiss Franc exchange rates to analyze CIP, and broader data for PPP analysis. The methodology includes both linear and non-linear models to account for potential complexities in the relationships.
- Testing the validity of the Covered Interest Rate Parity (CIP) hypothesis.
- Evaluating the Purchasing Power Parity (PPP) hypothesis using various econometric methods.
- Employing linear and non-linear time series models, such as TAR and STAR models.
- Analyzing the relationship between spot and forward exchange rates.
- Comparing empirical findings with existing literature on CIP and PPP.
Zusammenfassung der Kapitel (Chapter Summaries)
PART 1: COVERED AND UNCOVERED INTEREST RATE PARITY: This part investigates the covered and uncovered interest rate parity (CIP and UIP) between the US dollar and the Swiss Franc. It begins by presenting descriptive statistics of spot and forward exchange rates, followed by an examination of the random walk hypothesis for spot returns and unit root tests to assess stationarity. The core of this section focuses on testing CIP through linear and non-linear models (TAR and STAR), and subsequently evaluating UIP using cointegration tests, vector error correction models, impulse response functions, threshold cointegration, and dynamic OLS estimation. The analysis aims to determine the validity of these parity conditions and identify potential deviations and their underlying causes.
Introduction: This introductory chapter sets the stage for the analysis of covered and uncovered interest rate parity, outlining the specific currencies (USD and CHF) and the econometric methods employed to examine these relationships. The chapter emphasizes the importance of understanding these parities within international finance.
Literature Review: This chapter reviews existing literature on interest rate parity, summarizing key findings and methodologies from various studies. The discussion highlights different approaches to testing parity conditions, including those from Fama (1984), McMillan (2005), Hai et al. (1997), Murfin and Ormerod (1983), Goodhart et al. (1997), Klein (1990), Sachsida et al. (2001), Carvalho et al. (2004), Rowland (2005), and Froot (1990), among others. The review contextualizes the current research within the broader academic discourse.
PART 2: PURCHASING POWER PARITY HYPOTHESIS: This part delves into the purchasing power parity (PPP) hypothesis, utilizing various econometric approaches to test its validity. It begins with an overview of PPP, a literature review summarizing previous empirical investigations, and the presentation of the dataset utilized. This section then details statistical analyses including unit root tests for stationarity, and proceeds to rigorously examine PPP via several testing methods: linear tests, cointegration tests, panel unit root tests, long-span tests, and finally non-linear tests (TAR, STAR, and Markov switching models). The aim is to provide a comprehensive evaluation of the PPP hypothesis across different methodological frameworks.
Introduction: This chapter introduces the purchasing power parity (PPP) hypothesis and outlines the research questions and methodology used in this section of the study. It sets the context for the subsequent analysis and describes the overall goal of testing the validity of PPP.
Literature Review: This chapter reviews the existing literature on the purchasing power parity hypothesis, summarizing prior empirical studies and their findings. The review discusses different methodologies used to test PPP and highlights the ongoing debate surrounding its validity in various contexts.
Schlüsselwörter (Keywords)
Covered Interest Rate Parity, Uncovered Interest Rate Parity, Purchasing Power Parity, Exchange Rates, Spot Rates, Forward Rates, Interest Rate Differentials, Cointegration, Time Series Analysis, Non-Linear Models, TAR, STAR, Vector Error Correction Model (VECM), Dynamic OLS (DOLS), US Dollar, Swiss Franc, Econometrics, International Finance.
Frequently Asked Questions: A Comprehensive Language Preview
What is the main topic of this research project?
This research project examines the validity of two fundamental concepts in international finance: Covered Interest Rate Parity (CIP) and Purchasing Power Parity (PPP). It investigates these hypotheses using various econometric techniques, focusing on the US dollar and Swiss Franc exchange rates.
What hypotheses are tested in this research?
The study tests both the Covered Interest Rate Parity (CIP) and the Purchasing Power Parity (PPP) hypotheses. CIP examines the relationship between spot and forward exchange rates and interest rate differentials, while PPP investigates the relationship between exchange rates and price levels across countries.
What data is used in the analysis?
The research utilizes data on US dollar and Swiss Franc exchange rates for the CIP analysis, and broader data for the PPP analysis. The exact nature and scope of the data are detailed within the study itself.
What methodologies are employed in this research?
The research employs a wide range of econometric techniques, including both linear and non-linear time series models. Specific methods used include linear tests, non-linear tests (like Threshold Autoregressive (TAR) and Smoothing Transition Autoregressive (STAR) models), cointegration tests, Vector Error Correction Models (VECM), Dynamic OLS (DOLS), panel unit root tests, and Markov switching models. The choice of method depends on the specific hypothesis being tested and the nature of the data.
What are the key findings of the study (in general terms)?
The study aims to determine the validity of CIP and PPP, identifying any deviations and their potential causes. A comprehensive evaluation is provided across different methodological frameworks. Specific findings on the validity of each hypothesis are detailed within the respective chapters of the full research document.
How is the research organized?
The research is divided into two main parts: Part 1 focuses on Covered and Uncovered Interest Rate Parity, and Part 2 focuses on the Purchasing Power Parity Hypothesis. Each part includes an introduction, literature review, data description, summary statistics, unit root and stationary tests, and various econometric tests specific to each hypothesis. Conclusions are provided for each part.
What are the key themes explored in this research?
Key themes include testing the validity of CIP and PPP, employing linear and non-linear time series models (TAR and STAR), analyzing the relationship between spot and forward exchange rates, and comparing empirical findings with existing literature on CIP and PPP.
What are the key words associated with this research?
Key words include Covered Interest Rate Parity, Uncovered Interest Rate Parity, Purchasing Power Parity, Exchange Rates, Spot Rates, Forward Rates, Interest Rate Differentials, Cointegration, Time Series Analysis, Non-Linear Models, TAR, STAR, Vector Error Correction Model (VECM), Dynamic OLS (DOLS), US Dollar, Swiss Franc, Econometrics, and International Finance.
Where can I find the complete research document?
The complete research document containing detailed analysis, data, and results is not included in this FAQ. This FAQ provides only a summary and overview of its contents.
What is the intended audience of this research?
This research is intended for academic use, focusing on the analysis of themes in a structured and professional manner.
- Citar trabajo
- Eleftherios Giovanis (Autor), 2008, A Research Examination of Covered-Uncovered Interest Rate Parity and the Purchase Power Parity (PPP) hypothesis: Applications in MATLAB, RATS and EVIEWS, Múnich, GRIN Verlag, https://www.grin.com/document/142520
