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Testing the Foreign Exchange Parity Relations: A Case Analysis of UK Sterling, Japanese Yen and Us Dollar

Received: 28 November 2014     Accepted: 9 December 2014     Published: 27 December 2014
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Abstract

Since the financial globalization has expanded and developed increasingly fast in recent years, the international parity relationships have been extensively studied due to their importance in international trade and investment. This paper investigates purchasing power parity (PPP), interest rate parity (IRP) and unbiased expectation hypothesis by analyzing three main currencies; UK sterling, Japanese Yen and US dollar during 2008 to 2010. Further, forward premium or discount is calculated and interpret in the study with time series data and ordinary least square (OLS) regression methodologies. It was found that, the unbiased expectation hypothesis and international interest parity holds for Japan-US case but does not hold for Japan-UK case. Finally, the purchasing Power Parity (PPP) holds for both two cases, which is varies with most previous literature.

Published in International Journal of Economics, Finance and Management Sciences (Volume 2, Issue 6)
DOI 10.11648/j.ijefm.20140206.18
Page(s) 356-361
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2014. Published by Science Publishing Group

Keywords

Testing the Foreign Exchange Parity Relations: A Case Analysis of UK Sterling, Japanese Yen and Us Dollar

References
[1] Baig, T. and Golfajn, I. (2002), ‘Monetary Policy in the Aftermath of Currency Crises: The Case of Asia’, Review of International Economics, vol. 10(1), pp.92-112.
[2] Chinn, M. D., & Meredith, G. (2004), ‘Monetary policy and long-horizon uncovered interest parity’, International Monetary Fund Staff Papers, vol.51, pp.409-430.
[3] Cosander, P. A., & Laing, B. R. (1981), ‘Interest Rate Parity Tests: Switzerland and Some Major Western Countries’, Journal of Banking and Finance, vol.5, pp.187-200.
[4] Lothian, J.R., & Wu L. (2005), ‘Uncovered Interest-Rate Parity over the Past Two Centuries’, Frank J. Petrilli Center for Research in International Finance CRIF Working Paper series.
[5] MacDonald, R. (1988), Floating exchange rates: Theories and evidence, Psychology Press.
[6] McCallum, B. T. (1994), ‘A reconsideration of the uncovered interest rate parity conditions’, Journal of Monetary Economics, vol.33, pp.105-132.
[7] Fama, E. F. (1984), ‘Forward and spot exchange rates’, Journal of Monetary Economics, vol.14, pp.319-338.
[8] Froot, K. A., & Frankel, J. A. (1989), ‘Forward Discount Bias: Is it an Exchange Risk Premium?’ , The Quarterly Journal of Economics, Vol.104, No. 1, pp.139-161.
[9] Joseph, N. L. (1995), ‘Co-integration, Error-correction Models, and Forecasting Using Realigned Foreign Exchange Rates’, Journal of Forecasting, vol.14, pp.499-522.
[10] O’Connell, P. G. J. (1998), ‘The Overvaluation of Purchasing Power Parity’, Journal of International Economics.
[11] Raymond, W. S. (2001), ‘Price and Volatility Spillovers between Interest Rate and Exchange Value of the US Dollar’, Global Finance Journal, vol.12, pp.95-107.
[12] Rogoff, K. (1996), ‘The Purchasing Power Parity Puzzle’, Journal of Economic Literature.
[13] Thornton, D. L., 1989, ‘Tests of Covered Interest Rate Parity’, Economic Research of Federal Reserve Bank of St. Louis.
Cite This Article
  • APA Style

    Ibrahim Zubairu. (2014). Testing the Foreign Exchange Parity Relations: A Case Analysis of UK Sterling, Japanese Yen and Us Dollar. International Journal of Economics, Finance and Management Sciences, 2(6), 356-361. https://doi.org/10.11648/j.ijefm.20140206.18

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    ACS Style

    Ibrahim Zubairu. Testing the Foreign Exchange Parity Relations: A Case Analysis of UK Sterling, Japanese Yen and Us Dollar. Int. J. Econ. Finance Manag. Sci. 2014, 2(6), 356-361. doi: 10.11648/j.ijefm.20140206.18

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    AMA Style

    Ibrahim Zubairu. Testing the Foreign Exchange Parity Relations: A Case Analysis of UK Sterling, Japanese Yen and Us Dollar. Int J Econ Finance Manag Sci. 2014;2(6):356-361. doi: 10.11648/j.ijefm.20140206.18

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  • @article{10.11648/j.ijefm.20140206.18,
      author = {Ibrahim Zubairu},
      title = {Testing the Foreign Exchange Parity Relations: A Case Analysis of UK Sterling, Japanese Yen and Us Dollar},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {2},
      number = {6},
      pages = {356-361},
      doi = {10.11648/j.ijefm.20140206.18},
      url = {https://doi.org/10.11648/j.ijefm.20140206.18},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20140206.18},
      abstract = {Since the financial globalization has expanded and developed increasingly fast in recent years, the international parity relationships have been extensively studied due to their importance in international trade and investment. This paper investigates purchasing power parity (PPP), interest rate parity (IRP) and unbiased expectation hypothesis by analyzing three main currencies; UK sterling, Japanese Yen and US dollar during 2008 to 2010. Further, forward premium or discount is calculated and interpret in the study with time series data and ordinary least square (OLS) regression methodologies. It was found that, the unbiased expectation hypothesis and international interest parity holds for Japan-US case but does not hold for Japan-UK case. Finally, the purchasing Power Parity (PPP) holds for both two cases, which is varies with most previous literature.},
     year = {2014}
    }
    

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    T1  - Testing the Foreign Exchange Parity Relations: A Case Analysis of UK Sterling, Japanese Yen and Us Dollar
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    AB  - Since the financial globalization has expanded and developed increasingly fast in recent years, the international parity relationships have been extensively studied due to their importance in international trade and investment. This paper investigates purchasing power parity (PPP), interest rate parity (IRP) and unbiased expectation hypothesis by analyzing three main currencies; UK sterling, Japanese Yen and US dollar during 2008 to 2010. Further, forward premium or discount is calculated and interpret in the study with time series data and ordinary least square (OLS) regression methodologies. It was found that, the unbiased expectation hypothesis and international interest parity holds for Japan-US case but does not hold for Japan-UK case. Finally, the purchasing Power Parity (PPP) holds for both two cases, which is varies with most previous literature.
    VL  - 2
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Author Information
  • Department of Accountancy Studies, School of Business, Accra Polytechnic, Accra, Ghana

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