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Investigation of smooth breaks and nonlinear mean reversion in real interest parity: evidence from asian countries
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Date
2017
Author
Gülcü, Abdullah
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This study explores the empirical validity of long run Real Interest Parity (RIP) for a set of Asian countries for the period of January 1984 and August 2016 by taking Japan as a base country. We apply unit root test of Christopoulos and Leon-Ledesma (2010) which enables us to measure infrequent smooth temporary breaks and nonlinear mean reversion in the real interest rate differential (rid) series simultaneously. We model the smooth breaks by Fourier function while nonlinearity in rids series are model by modified versions of the most recently developed exponential smooth transition autoregressive (ESTAR) models of Kapetanios et al. (2003) and Kılıç (2011). The results provide strong evidence in favor of RIP for Asian countries when smooth breaks are taken into consideration and nonlinearity in the rids series are correctly specified. Our findings also reveal that for most of the countries Fourier functions have one frequency which is associated with 1997 Asian Crisis.
Subject Keywords
Interest rates.
,
Interest rate risk.
URI
http://etd.lib.metu.edu.tr/upload/12621369/index.pdf
https://hdl.handle.net/11511/26830
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Graduate School of Social Sciences, Thesis
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A. Gülcü, “Investigation of smooth breaks and nonlinear mean reversion in real interest parity: evidence from asian countries,” M.S. - Master of Science, Middle East Technical University, 2017.
