Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2002-12-02
Number: 02-115/2
Author-Name: Rosita P. Chang
Author-Workplace-Name: University of Hawai'i
Author-Name: Sang-Hyop Lee
Author-Workplace-Name: University of Hawai'i
Author-Name: Sean F. Reid
Author-Workplace-Name: University of New Haven
Author-Name: S. Ghon Rhee
Author-Email: rheesg@hawaii.edu
Author-Workplace-Name: University of Hawai'i
Title: One-Way Arbitrage-Based Interest Parity
Abstract: This study is motivated by two major considerations. First, the Fletcher andTaylor (1996) approach has yet to be applied to short-date markets to assess thediminishing role of transaction costs in explaining the devjatjons of observed forwardforeign exchange prices from interest parity forward prices. Second, the role oftransaction costs in one-way arbitrage-based interest parity has not been examined.Applying the Fletcher and Taylor approach to one-way arbitrage-based interest parity inshort-date capital markets, we document three major findings: (i) a narrower neutralband around interest parity line, as implied by one-way arbitrage, does not diminish therole of transaction costs; (ii) the varjances of the estimated deviations are a decreasingfunction of the time spent outside the transactions cost band; and (iii) the magnitude ofarbitrage profits tends to be small and economically insignificant though profitableopportunities are not rare in the short-date markets studied.
File-Url: https://papers.tinbergen.nl/02115.pdf
File-Format: application/pdf
File-Size: 84331 bytes
Handle: RePEc:tin:wpaper:20020115