TY - JOUR
T1 - An empirical study of nonlinear adjustment in the UIP model using a smooth transition regression (STR) model
AU - Li, Dandan
AU - Ghoshray, A
AU - Morley, B
PY - 2013/12
Y1 - 2013/12
N2 - This study considers the nonlinear relationship between the expected exchange rate change and the interest rate differential, using STR models (ESTR and LSTR), with Sharpe ratios, interest rate differentials and exchange rate volatilities as the transition variables. The results generally conclude that UIP holds with the larger Sharpe ratio and higher exchange rate volatility regimes, which is consistent with the transaction costs and limits to speculation hypotheses. However, the interest rate differential (which is generally not used much as a transition variable) when used in this study results in a failure to support UIP in the upper regime, which suggests it is the risk not the pure return that determines the transition.
AB - This study considers the nonlinear relationship between the expected exchange rate change and the interest rate differential, using STR models (ESTR and LSTR), with Sharpe ratios, interest rate differentials and exchange rate volatilities as the transition variables. The results generally conclude that UIP holds with the larger Sharpe ratio and higher exchange rate volatility regimes, which is consistent with the transaction costs and limits to speculation hypotheses. However, the interest rate differential (which is generally not used much as a transition variable) when used in this study results in a failure to support UIP in the upper regime, which suggests it is the risk not the pure return that determines the transition.
UR - http://www.scopus.com/inward/record.url?scp=84881246823&partnerID=8YFLogxK
UR - http://dx.doi.org/10.1016/j.irfa.2013.07.012
U2 - 10.1016/j.irfa.2013.07.012
DO - 10.1016/j.irfa.2013.07.012
M3 - Article
SN - 1057-5219
VL - 30
SP - 109
EP - 120
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
ER -