Conditions of pure arbitrage applications: Evidence from three currencies
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Date
2016
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Open Access Location
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Addleton Academic Publishers
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Abstract
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.
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Economics, Management, and Financial Markets, 2016, 11 (3), pp. 11 - 20