Nonlinear Analysis of the Uncovered Interest Parity in Latin American Countries

by Leng, Chuan-chiang

Abstract (Summary)
Abstract Most of literature and studies on prediction of exchange rate focus on main industrial countries with few discussions on the exchange rate of the developing countries. For model residual differences can be found in a linear model, so the linear model will adjust to find equilibrium at a fixed speed. However, it is difficult for the linear model to capture the character of dynamic adjustment behavior if a non-linear adjustment relationship exists (Sarno, 2002). Moreover, in case the trading costs exist in the foreign exchange market or the technical analysis is widely used among traders, then the deviations from equilibrium exchange rate may present a non-linear adjustment trend. In view of this, this study employed the STAR (smooth transition autoregression) model developed by Granger and Terasvirta (1993) to discuss the dynamic adjustment process of the deviations from UIP in the seven countries in Latin America. In most of the experimental studies conducted in the past, it was found difficult to establish the assumptions of uncovered interest parity (UIP). Therefore, this study is aimed to verify the experimental studies on UIP in the Latin America under the non-linear framework by means of non-linear model analysis.
Bibliographical Information:

Advisor:Ching-Nun Lee; Yung-hsiang Ying; Ming-jang Weng

School:National Sun Yat-Sen University

School Location:China - Taiwan

Source Type:Master's Thesis

Keywords:uncovered interest parity nonlinear analysis


Date of Publication:08/04/2008

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