The LKR/JPY Rate and the UIP

Nirmali H and Rajapakse R P C R, The LKR/JPY Rate and The UIP, Journal for Stuides in Management and Planning Vol3, Issue 4, EduPedia Publications (P) Ltd. pp131-143

13 Pages Posted: 6 Apr 2017

Date Written: March 5, 2017

Abstract

Of the main theories that explore on Interest rates and exchange rates, Uncovered Interest Rate Parity (UIP) states that the interest rate differential is an unbiased predictor of the spot exchange rate changes. The impact on investors is that there would be no short term arbitrage profits. Studies based on the relationship between these two variables are rare for developing countries like Sri Lanka. Therefore in order to bridge that gap identified through search for literature, Autoregressive Distributed Lags method was employed here to test the UIP. Monthly data on exchange rates and three month risk free interest rates with regard to the selected major external trader, Japan for the period from 2001-2014 were used for this purpose. The findings reveal that UIP does not hold in the short run but there is evidence for UIP to hold in the long run for Sri Lanka.

Keywords: Autoregressive Distributed Lags (ARDL) Model, Exchange Rates, Interest Rates, Uncovered Interest Rate Parity (UIP), Unit root tests

JEL Classification: F31, F41, P45

Suggested Citation

Kaushala, Hiruni and Rajapakse, R. P. C. R., The LKR/JPY Rate and the UIP (March 5, 2017). Nirmali H and Rajapakse R P C R, The LKR/JPY Rate and The UIP, Journal for Stuides in Management and Planning Vol3, Issue 4, EduPedia Publications (P) Ltd. pp131-143. Available at SSRN: https://ssrn.com/abstract=2946812

Hiruni Kaushala

Independent ( email )

No Address Available
United States

R. P. C. R. Rajapakse (Contact Author)

University of Sri Jayewardenepura ( email )

Nugegoda
Gandodawila
Gangodawila, Nugegoda 10250
Sri Lanka

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
14
Abstract Views
150
PlumX Metrics