A rank approach for studying cross-currency bases and the covered interest rate parity

Borradores de Economia
Número: 
994
Publicado: 
Clasificación JEL: 
C12, C33, E43
Palabras clave: 
Paridad cubierta de tasas de interés, Pruebas de rango no paramétricas, Cointegración, Series de tiempo en panel
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We use the recently developed panel rank-cointegration test proposed by Pedroni et al. [2015] to check for the stability conditions of the cross-country money market interest rate bases. Using weekly information on short-term interest rates and spot and forward exchange rates for a set of 20 European economies during 2005-2017, we show that in most cases these bases are non-stationary, implying the failure of the Covered Interest Rate Parity condition. Concretely, a mean-reverting behavior is encountered in only two cases. The first includes Greece, Italy and Portugal, while the second Belgium, France and Germany.