Testing the Validity of Uncovered Interest Rate Parity in India
|
| Title | Testing the Validity of Uncovered Interest Rate Parity in India |
| Authors | |
| Abstract | Abstract: One vital potential issue determining the exchange rate is the uncovered interest rate parity (UIP). Uncovered interest parity (UIP) is a typical subject of international finance, a critical building block of most theoretical models, and a miserable empirical failure. Uncovered interest rate parity (UIP) states that the nominal interest rate differential between two countries must be equal to expected change in the exchange rate. In other words, if UIP condition holds, then high yield currencies should be expected to depreciate. The article attempts to test the validity of uncovered interest rate parity based on a theoretical formulation in line with economic theory. Although KPSS test suggest that excess return series are in stationary process, excess return curve shows erratic behaviour during some months of our study period (showing negative trend) which automatically excludes the possibility for the UIP to hold. The UIP regression estimate indicates that there is no statistically significant evidence that suggests the uncovered interest rate parity to hold during January,2006 –July,2010 for domestic interest rate (weighted average call money rate).This indicates that interest rate spread is a very poor predictor of exchange rate yields. Thus, the UIP hypothesis fails in India. |
| Publisher | World Science Publisher |
| Date | 2012-08-08 |
| Source | 2167-6348 |
| Rights | Copyright NoticeProposed Creative Commons Copyright Notices1. Proposed Policy for Journals That Offer Open AccessAuthors who publish with this journal agree to the following terms:Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work´s authorship and initial publication in this journal.Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal´s published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).Proposed Policy for Journals That Offer Delayed Open AccessAuthors who publish with this journal agree to the following terms:Authors retain copyright and grant the journal right of first publication, with the work [SPECIFY PERIOD OF TIME] after publication simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work´s authorship and initial publication in this journal.Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal´s published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access). |