A Research Examination of Covered-Uncovered Interest Rate Parity and the Purchase Power Parity (PPP) hypothesis: Applications in MATLAB, RATS and EVIEWS

Dossier / Travail , 2008 , 111 Pages , Note: 95.00%

Gestion d'entreprise - Investissement et Financement

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
    • Literarute 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
    • Power Purchasing 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 and uncovered interest rate parity (IRP) and the purchasing power parity (PPP) hypothesis. The study aims to investigate the validity of these theoretical concepts in the context of the US dollar and Swiss franc exchange rates. The project utilizes various econometric techniques, including unit root tests, cointegration analysis, and threshold models, to analyze the data and draw conclusions about the relationships between interest rates, exchange rates, and price levels.

• Covered and Uncovered Interest Rate Parity
• Purchasing Power Parity Hypothesis
• Econometric Techniques: Unit Root Tests, Cointegration Analysis, Threshold Models
• Empirical Analysis of US Dollar and Swiss Franc Exchange Rates
• Testing the Validity of IRP and PPP Theories

Zusammenfassung der Kapitel (Chapter Summaries)

Part 1 of the research project focuses on the covered and uncovered interest rate parity (IRP) between the US dollar and Swiss franc. It begins by examining the descriptive statistics of spot and forward exchange rates, followed by an analysis of the random walk behavior of spot returns. The study then investigates the validity of the covered IRP hypothesis through linear and non-linear tests. The uncovered IRP hypothesis is similarly assessed using cointegration analysis, vector error correction models, and impulse response analysis.

Part 2 examines the purchasing power parity (PPP) hypothesis. The chapter explores the relationship between exchange rates and price levels, using various econometric techniques, including linear and non-linear tests, cointegration analysis, and panel unit root tests.

Schlüsselwörter (Keywords)

The primary focus of this research project is on covered and uncovered interest rate parity (IRP), purchasing power parity (PPP), exchange rate dynamics, unit root tests, cointegration analysis, threshold models, and econometric techniques. The study utilizes data on US dollar and Swiss franc exchange rates to empirically investigate the validity of these economic theories.

• Note: 95.00%
• Auteur: Eleftherios Giovanis (Auteur)
• Année de publication: 2008
• Pages: 111
• N° de catalogue: V142520
• ISBN (ebook): 9783640538683
• ISBN (Livre): 9783640538553
• Langue: anglais
• mots-clé: purchasing power parity, Covered Uncovered Interest Rate Parity, EVIEWS, RATS, MATLAB, exchange rates, Smoothing Transition Autoregressive, Markov Switching Autoregressive Regime, Threshold Autoregressive, Cointegration, unit root