This study analyzes the pure arbitrage conditions across three of the “Anglo-Saxon capitalism” currencies: Australian dollar, British pound, and US dollar. We examine the relationship between spot-forward exchange rates and domesticforeign interest rates in financial markets. We find that the most important determinants that contribute to the occurrence of pure arbitrage conditions are domestic spot currency rate and domestic interest rate. Daily data is collected from the DataStream/Thomson Reuters database and analyzed in probit regression models. The predicting accuracy check is conducted through in-sample and out-of-sample tests. Our results indicate that the level of significance for factor coefficients and prediction accuracy decrease with the time lag: the longer the time lag, the lower the prediction power.
Economics, Management, and Financial Markets, 2016, 11 (3), pp. 11 - 20