Interest parity,fractional differencing,and the strength of attraction: a reexamination of the cost-of-carry futures pricing model

This article discusses the strength of attraction in the cointegration of foreign exchange futures prices and their own cash prices under a cost-of-carry futures pricing model. The memories of the residuals in cointegration regression are analyzed by using the fractional cointegration of Cheung and Lai (1993) and the data-tapered method of Hurvich and Ray (1995) with fractional-difference time-series models. The investigation includes the foreign exchange futures and cash prices of the Swiss franc, the Japanese yen, the Deutsche mark, and the British pound. Although the empirical results indicate the existence of cointegration for the foreign exchange futures and cash prices, the strength of attraction is relatively weak.