The long-run uncovered interest rate parity in view of a trading strategy

Citation

Chin, C.-C. (2010), "The long-run uncovered interest rate parity in view of a trading strategy", Strategic Direction, Vol. 26 No. 4. https://doi.org/10.1108/sd.2010.05626dad.005

The long-run uncovered interest rate parity in view of a trading strategy

Article Type: Abstracts From: Strategic Direction, Volume 26, Issue 4

Chin C-C., Liang H-M.Applied Economics (UK), August-September 2009, Vol. 41 Nos 19-21, Start page: 2727, No. of pages: 13

Purpose – Develops a strategy for taking advantage of the long-term uncovered interest rate parity (UIP) for home and foreign bonds. Design/approach/methodology – Explains UIP (no expected excess return in an efficient market with home and foreign bonds with the same maturity) in econometric terms, citing prior studies of 1- and 5-year maturities that reject or partially support UIP. By contrast, looks at 2-, 4- and 6-year horizons, using US dollar bonds against sterling and Deutschemark bonds, and sterling against Deutschemark bonds. Develops a strategy of switching holdings depending on returns for investment horizons of 1, 2 and 3 years. Findings – Finds that UIP is partly valid for 6 year horizon, but not for 2 and 4 years. Shows that the dollar pairs perform better than the sterling/Deutschemark pair. Reveals that the average deviation from UIP declines with maturity. In support of UIP, confirms a positive return on the switching strategy for a three year horizon.Article type: Research paperISSN: 0003-6846Reference: 38AZ986

Keywords: Bonds, Currencies, Interest rates, Portfolio investment, Profitability, USA