A rank approach for studying cross-currency bases and the covered interest rate parity
We use a panel rank cointegration approach to check for the stability conditions of the cross-country money market interest rate basis. Using weekly information on short-term interest rates and spot and forward exchange rates for a set of 20 European economies between 2005 and 2017, we show that in most cases these bases are non-stationary, implying the failure of the covered interest rate parity condition. Concretely, a mean-reverting behavior is encountered in only two cases. The first includes Greece, Italy and Portugal, while the second Belgium, France and Germany.
KeywordsCovered interest rate parity Nonparametric rank tests Cointegration Time series panel Cross-currency basis
JEL ClassificationC12 C33 E43
Compliance with ethical standards
Conflict of interest
All authors declare they have no conflict of interest.
This article does not contain any studies with human participants or animals performed by any of the authors.
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