Testing uncovered interest rate parity using LIBOR |
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| Authors: | Muhammad Omer Jakob de Haan Bert Scholtens |
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| Institution: | 1. Economics and Business, University of Groningen, Groningen, 9700 AV, Netherlandsm.omer@rug.nl;3. Economics and Business, University of Groningen, Groningen, 9700 AV, Netherlands;4. Finance, University of Groningen, Groningen, 9700 AV, Netherlands |
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| Abstract: | We test uncovered interest rate parity (UIP) using London InterBank Offered Rate (LIBOR) interest rates for a wide range of maturities. In contrast to other markets, LIBOR markets have minimal frictions. Whereas most previous studies reject UIP, we find that UIP holds for several short-term LIBOR maturities using block bootstrap panel unit root tests suggested by Palm et al. (2011) and cointegration techniques by Westerlund (2007). Furthermore, the estimation results suggest that the speed of adjustment to the long-run equilibrium marginally differs across the maturity of the underlying instrument, thus supporting the efficient market hypothesis. |
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| Keywords: | UIP LIBOR block bootstrap panel unit root test panel cointegration |
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