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Testing Uncovered Interest Parity for Structural Breaks: A Developing Country Perspective

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Economic Crisis, Development and Competitiveness in Southeastern Europe

Part of the book series: Contributions to Economics ((CE))

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Abstract

This article is a single-country empirical study of uncovered interest parity. Uncovered interest parity (hereafter UIP) is a non-arbitrary condition well-known and widely tested in international finance. This test of UIP is based on high-frequency data. The most promising parts of the evidence are the EGARCH analysis of statistical properties of time series of deviations from UIP, and the Markov Switching model. EGARCH (1,1) delivers a model able to predict future volatility of the tested variable. Moreover, the model also describes the time-varying nature of volatility itself. The changing nature of volatility may arise due to the process of information arrivals or being liquidity driven, but can also be a consequence of some structural breaks. Namely, the time series remains homoscedastic in the short-term while heteroscedasticity appears in long-term horizons. The regime switching model is further employed in order to test if the smoothed probabilities along the sample reflect the main events through which the economy evolved over time. The model proved to be able to indicate correctly the ex-ante identified structural break that came from crisis incident, but failed to differ between pre- and post-liberalisation periods.

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Acknowledgement

The authors are grateful to the Republic of Serbia Ministry of Education, Science and Technological Development for the funds and support that made this research possible.

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Authors and Affiliations

  1. Faculty of Economics, University of Niš, Trg kralja Aleksandra Ujedinitelja 11, 18000, Niš, Republic of Serbia

    Srđan Marinković & Ognjen Radović

  2. University of Wales Trinity Saint David, Swansea Campus, Swansea, SA1 6ED, Wales, UK

    Željko Šević

Authors
  1. Srđan Marinković
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  2. Ognjen Radović
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  3. Željko Šević
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Correspondence to Srđan Marinković .

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Editors and Affiliations

  1. Eastern Macedonia and Thrace Institute of Technology, Kavala, Greece

    Anastasios Karasavvoglou

  2. University of Macedonia, Thessaloniki, Greece

    Dimitrios Kyrkilis

  3. University of Macedonia, Thessaloniki, Greece

    Georgios Makris

  4. Eastern Macedonia and Thrace Institute of Technology, Kavala, Greece

    Persefoni Polychronidou

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Marinković, S., Radović, O., Šević, Ž. (2016). Testing Uncovered Interest Parity for Structural Breaks: A Developing Country Perspective. In: Karasavvoglou, A., Kyrkilis, D., Makris, G., Polychronidou, P. (eds) Economic Crisis, Development and Competitiveness in Southeastern Europe. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-40322-9_8

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