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Emerging Market Liberalization and the Impact on Uncovered Interest Rate Parity

FRB of Atlanta Working Paper No. 2002-16

56 Pages Posted: 5 Dec 2002  

Bill B. Francis

University of South Florida - College of Business Administration

Delroy M. Hunter

University of South Florida

Iftekhar Hasan

Gabelli School of Business, Fordham University; Bank of Finland

Date Written: August 2002

Abstract

In this paper we make use of the uncovered interest rate parity (UIRP) relationship to examine the extent that the liberalization of emerging financial markets has resulted in the integration of developing countries' currency markets into the international capital market. Previous tests of the impact of liberalization on the integration of emerging markets capital markets into world financial markets are confined to equity markets, ignoring currency markets that arguably are more important in determining the success of financial liberalization. We find that, in general, deviation from UIRP in the emerging markets is systematic in nature and that a significant part of emerging market currency excess returns is attributable to time-varying risk premium. Importantly we also find that these countries' currency deposits provide U.S. (equity) investors the benefits of international diversification. Our results also show that for some markets, liberalization improved (worsened) investors' perception of growth opportunity while reducing (increasing) investors' perception of the probability of financial distress. Finally, while several countries benefited from liberalization and have become more integrated into the world capital market, the experience is country specific.

Keywords: capital market integration, uncovered interest rate parity (UIRP), financial liberalization, GARCH model

JEL Classification: F21, F31, F36

Suggested Citation

Francis, Bill B. and Hunter, Delroy M. and Hasan, Iftekhar, Emerging Market Liberalization and the Impact on Uncovered Interest Rate Parity (August 2002). FRB of Atlanta Working Paper No. 2002-16. Available at SSRN: https://ssrn.com/abstract=325821 or http://dx.doi.org/10.2139/ssrn.325821

Bill B. Francis

University of South Florida - College of Business Administration ( email )

4202 E. Fowler Avenue, BSN 3403
Dept. of Finance
Tampa, FL 33620-5500
United States
813-974-6300 (Phone)
813-974-3030 (Fax)

HOME PAGE: http://www.coba.usf.edu/departments/finance/facult

Delroy M. Hunter

University of South Florida ( email )

Dept of Finance, Muma College of Business
4202 E. Fowler Ave, BSN3403
Tampa, FL 33620
United States
(813) 843-2085 (Phone)
(813) 974-3084 (Fax)

HOME PAGE: http://www.usf.edu/business/contacts/hunter-delroy.aspx

Iftekhar Hasan (Contact Author)

Gabelli School of Business, Fordham University ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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