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A rank approach for studying cross-currency bases and the covered interest rate parity

  • Jose E. Gomez-GonzalezEmail author
  • Santiago Gomez-Malagon
  • Luis F. Melo-Velandia
  • Daniel Ordoñez-Callamand
Article

Abstract

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.

Keywords

Covered interest rate parity Nonparametric rank tests Cointegration Time series panel Cross-currency basis 

JEL Classification

C12 C33 E43 

Notes

Compliance with ethical standards

Conflict of interest

All authors declare they have no conflict of interest.

Ethical approval

This article does not contain any studies with human participants or animals performed by any of the authors.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  • Jose E. Gomez-Gonzalez
    • 1
    Email author
  • Santiago Gomez-Malagon
    • 1
  • Luis F. Melo-Velandia
    • 1
  • Daniel Ordoñez-Callamand
    • 1
  1. 1.Banco de la Republica (Central Bank of Colombia)BogotáColombia

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