Die Arbeit untersucht und erläutert die verschiedenen wissenschaftlichen Ergebnisse von renommierten Untersuchungen. The covert interest rate parity is a well-established theory model, which holds not 100%, but the principle hold nearly for most of the time in highly developed countries. The CIRP theory cares for more efficient exchange markets. However, in unstable or crisis situations the CIRP is more susceptible, it is also in developing countries with factors such as political risk, credit risk or the lack of information. Then the CIRP could not hold, this means the exchange markets can be inefficient, for reasons like a lack of information, the markets can be still efficient because they are above risks and have been incorporated, Keynes assumes in his original theory that deviations of 0.5% percent for investors due to rate adjustments during trading and transaction costs, margin becomes smaller and smaller during the time at last due to the information technology and the associated ever-faster trade opportunities and reduces transaction costs ensure more that the CIRP holds better. However the information technology just reduces the deviations, but do not influence factors like default risks or opportunity costs.
Table of Contents
1. Introduction
1.1 Interest parity theory
1.2 Market efficiency regarding to CIRP
2. Covered interest rate parity
2.1 Differences between CIRP and UIRP
2.2 Composition of the CIRP
3. Discussion
3.1 Transaction costs
3.2 Economical Situation
3.3 Development of the countries
3.4 Taxes
3.5 Opportunity costs
3.6 Other reasons for deviation
3.7 Summary regarding to market efficiency
4. Development of the efficiency
5. Conclusion
Objectives and Topics
This assignment examines the concept of Covered Interest Rate Parity (CIRP) in relation to foreign exchange market efficiency. It investigates why deviations from the theory occur, how market conditions and technology influence these results, and whether the theory effectively holds in various economic contexts.
- The theoretical foundations of interest parity and market efficiency.
- Comparison between Covered and Uncovered Interest Rate Parity.
- Analysis of factors causing deviations, such as transaction costs and taxes.
- The impact of technological advancements on market efficiency.
- Empirical evidence regarding CIRP in developed versus emerging markets.
Excerpt from the Book
3.1 Transaction costs
Analysis of the CIRP leads to different results, this is due to the different performance of the conditions for CIRP influence the results, striking features are the following.
At first the transaction costs. Frenkel and Levich (1977) found that transaction costs are responsible in 99.5 percent of the cases for deviations from the CIRP. Al-Loughani and Moosa (2000) and Bhar, Kim and Pham (2004), also got to comprehend that obvious differences are due to transaction costs. For this reason often will be used a transaction cost bandwidth in analysis.
The studies by Branson, W.H. (1969), Frenkel. J.A. and Levich R.M. (1977), Levich (1978) Taylor, M. P. (1987), which are preparing high developed countries for time periods covered during and after Bretton Woods, have mostly the result that the CIRP with the transaction cost bandwidth holds. Taylor (1987) supposed that transaction costs are so low, that they could be unconsidered. There are deviations, but they are covered in the transaction cost bandwidth.
Summary of Chapters
1. Introduction: This chapter introduces the interest parity theory and the concept of market efficiency as a prerequisite for CIRP.
2. Covered interest rate parity: This section defines CIRP, contrasts it with Uncovered Interest Rate Parity (UIRP), and presents the mathematical composition of the parity relationship.
3. Discussion: This central chapter evaluates various factors causing deviations from CIRP, including transaction costs, economic environment, taxes, and country-specific development stages.
4. Development of the efficiency: This chapter tracks the historical trend of declining minimum profits required for arbitrage and the role of new technologies in increasing market efficiency.
5. Conclusion: The conclusion summarizes that while CIRP holds mostly in developed markets, it remains susceptible to risks and inefficiencies in emerging or unstable markets.
Keywords
Covered Interest Rate Parity, CIRP, Market Efficiency, Arbitrage, Transaction Costs, Exchange Rates, Capital Mobility, Interest Rate Differential, Forward Contracts, Financial Derivatives, Emerging Markets, Currency Exchange, Portfolio Investment, Monetary Model, Risk-free Arbitrage.
Frequently Asked Questions
What is the primary focus of this academic paper?
The paper discusses Covered Interest Rate Parity (CIRP) and its relationship with the efficiency of foreign exchange markets.
What are the central themes covered in the assignment?
The themes include the definition and conditions of CIRP, factors causing deviations from the theory, and the impact of information technology on market efficiency.
What is the main research objective?
The objective is to explain when and how the CIRP holds, why deviations occur in empirical data, and what these results imply for market efficiency.
Which methodology is employed in this study?
The study conducts a literature review and analysis of scientific studies to synthesize existing evidence on interest rate parity and market behavior.
What topics are addressed in the main body?
The main body examines transaction costs, economic situations, the impact of taxes, opportunity costs, and technological developments as drivers for CIRP deviations.
Which keywords best describe this work?
Key terms include CIRP, market efficiency, arbitrage, transaction costs, and currency exchange rate movements.
How do transaction costs affect CIRP according to the author?
The author notes that transaction costs are a primary reason for deviations from the parity, often represented as a "bandwidth" within which the theory still effectively holds.
Does the introduction of technology improve market efficiency?
Yes, the paper argues that new information technology and electronic trading platforms have minimized transaction costs and accelerated information flow, allowing markets to react faster and hold the CIRP more accurately.
- Quote paper
- Sascha Kurth (Author), 2010, Discuss covered interest rate parity (CIRP) with reference to foreign exchange market efficiency, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/165493
