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The uncovered interest rate parity anomaly and trading activity by non-dealer financial firms

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  • Boschen, John F.
  • Smith, Kimberly J.

Abstract

Since the 1990s there has been a substantial increase in foreign exchange market trading by non-dealer financial firms. Non-dealer financial firms comprise a market segment that includes hedge funds and mutual funds, among others. We investigate whether the growth of non-dealer financial firm trading affected the uncovered interest rate parity (UIP) anomaly, a phenomenon that seems to offer opportunities for excess returns. We find that the growth in trading volume by non-dealer financial firms is associated with some mitigation in the UIP anomaly. In contrast, growth in dealer-to-dealer and dealer-to-nonfinancial firm trading volume has no impact on the anomaly.

Suggested Citation

  • Boschen, John F. & Smith, Kimberly J., 2016. "The uncovered interest rate parity anomaly and trading activity by non-dealer financial firms," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 333-342.
    • Handle: RePEc:eee:reveco:v:45:y:2016:i:c:p:333-342
    DOI: 10.1016/j.iref.2016.05.006
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    More about this item

    Keywords

    Uncovered interest rate parity; Exchange rates; Foreign exchange markets; Electronic trading; Carry trade;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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