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Long-Run Implications of the Covered Interest Rate Parity Condition: Evidence during the Recent Crisis and Non-Crisis Periods

Nagayasu, Jun (2012): Long-Run Implications of the Covered Interest Rate Parity Condition: Evidence during the Recent Crisis and Non-Crisis Periods.

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Abstract

This paper analyzes the stationarity of forward premiums in foreign exchange markets. Considering a wide range of countries and contract periods and taking into account cross-sectional correlations and heterogeneities in nonstationary environments, we con�rmed mixed evidence of stationary forward premiums. Further analysis suggests that the nonstationary element has been attributable to regime shifts which are closely associated with the effects of the Lehman Shock and changing monetary policies. These effects can be captured by interest rates, leaving the covered interest parity condition as a valid economic concept at least in the long-run.

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