Using a daily time series from 1983 to 2005 of spot and forward USD/Yen prices and the equivalent maturity short term US and Japanese interest rates, we investigate the sensitivity over time of the difference between actual prices in forward markets and those calculated based upon covered interest parity (CIP). Overall, we find evidence of considerable variation in CIP departures from equilibrium over the sample period, which tend to be one way and favour those with the ability to borrow US dollars. Regression analysis reveals that interday negative changes in spot exchange rates, positive changes in US interest rates and negative changes in yen interest rates generally matter more than changes in interday volatility in these assets. These results are maintained during different subperiods of the sample. We conclude that arbitrage opportunities have persisted in the yen forward market although transaction costs and market segmentation provide a likely explanation for some of the departures from CIP equilibrium. Given the time varying nature of these distortions from equilibrium the sample period under investigation remains a critical issue when investigating the presence of long term dependence.
|Number of pages||1|
|Publication status||Published - 2006|
|Event||Annual Meeting of the Academy of International Business (48th : 2006) - Beijing, China|
Duration: 23 Jul 2006 → 26 Jul 2006
|Conference||Annual Meeting of the Academy of International Business (48th : 2006)|
|Period||23/07/06 → 26/07/06|