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Revisiting Covered Interest Parity in the European Union: the DCCA Approach

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  • Paulo Ferreira
  • Andreia Dionisio

Abstract

This paper analyzes the evidence of financial integration, with covered interest parity (CIP), for a group of countries that have already adopted the euro and another group of countries that kept their currencies. We use detrended cross-correlation analysis, which allows analyzing the behavior of time series even when they are not stationary. The main results indicate that countries that adopted the euro do not show much evidence in favor of CIP, before joining the Eurozone, which could imply they will not benefit from all common currency advantages. In the group of countries that did not adopt the euro, Denmark, Sweden, the UK and the Czech Republic are the ones presenting better conditions for financial integration with the euro, while Bulgaria has also some evidence of this. Some possible explanations of CIP deviations are agents not considering all countries' assets as similar and also the underdevelopment of markets and liquidity problems (more pronounced due to periods of turmoil).

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  • Paulo Ferreira & Andreia Dionisio, 2015. "Revisiting Covered Interest Parity in the European Union: the DCCA Approach," International Economic Journal, Taylor & Francis Journals, vol. 29(4), pages 597-615, December.
    • Handle: RePEc:taf:intecj:v:29:y:2015:i:4:p:597-615
    DOI: 10.1080/10168737.2015.1081260
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    Citations

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    Cited by:

    1. Oussama Tilfani & Paulo Ferreira & Andreia Dionisio & My Youssef El Boukfaoui, 2020. "EU Stock Markets vs. Germany, UK and US: Analysis of Dynamic Comovements Using Time-Varying DCCA Correlation Coefficients," JRFM, MDPI, vol. 13(5), pages 1-23, May.
    2. Ferreira, Paulo & Kristoufek, Ladislav, 2017. "What is new about covered interest parity condition in the European Union? Evidence from fractal cross-correlation regressions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 486(C), pages 554-566.
    3. Kuo-Shing Chen & Chien-Chiang Lee & Chun-Ming Chen, 2017. "Arbitrage, Covered Interest Parity and Cointegration Analysis on the New Taiwan Dollar/US Dollar FOREX Market Revisited," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 420-428.
    4. Nardo, M. & Ossola, E. & Papanagiotou, E., 2022. "Financial integration in the EU28 equity markets: Measures and drivers," Journal of Financial Markets, Elsevier, vol. 57(C).
    5. Ferreira, Paulo & Kristoufek, Ladislav, 2020. "Uncovered interest rate parity through the lens of fractal methods: Evidence from the European Union," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 553(C).
    6. Paulo Ferreira, 2017. "Portuguese and Brazilian stock market integration: a non-linear and detrended approach," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 16(1), pages 49-63, April.
    7. Dora Almeida & Andreia Dionísio & Paulo Ferreira & Isabel Vieira, 2023. "Impact of the COVID-19 Pandemic on Cryptocurrency Markets: A DCCA Analysis," FinTech, MDPI, vol. 2(2), pages 1-17, May.
    8. Ferreira, Paulo & Dionísio, Andreia & Guedes, Everaldo Freitas & Zebende, Gilney Figueira, 2018. "A sliding windows approach to analyse the evolution of bank shares in the European Union," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 490(C), pages 1355-1367.
    9. Nascimento Filho, A.S. & Pereira, E.J.A.L. & Ferreira, Paulo & Murari, T.B. & Moret, M.A., 2018. "Cross-correlation analysis on Brazilian gasoline retail market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 508(C), pages 550-557.
    10. Guedes, E.F. & Ferreira, Paulo & Dionísio, Andreia & Zebende, G.F., 2019. "An econophysics approach to study the effect of BREXIT referendum on European Union stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 1175-1182.
    11. Paulo Ferreira & Éder Pereira, 2019. "The impact of the Brexit referendum on British and European Union bank shares: a cross-correlation analysis with national indices," Economics Bulletin, AccessEcon, vol. 39(1), pages 335-346.
    12. Natália Costa & César Silva & Paulo Ferreira, 2019. "Long-Range Behaviour and Correlation in DFA and DCCA Analysis of Cryptocurrencies," IJFS, MDPI, vol. 7(3), pages 1-12, September.
    13. Thiago B. Murari & Aloisio S. Nascimento Filho & Eder J.A.L. Pereira & Paulo Ferreira & Sergio Pitombo & Hernane B.B. Pereira & Alex A.B. Santos & Marcelo A. Moret, 2019. "Comparative Analysis between Hydrous Ethanol and Gasoline C Pricing in Brazilian Retail Market," Sustainability, MDPI, vol. 11(17), pages 1-12, August.
    14. Ferreira, Paulo, 2018. "Efficiency or speculation? A time-varying analysis of European sovereign debt," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 490(C), pages 1295-1308.
    15. Ferreira, Paulo, 2016. "Does the Euro crisis change the cross-correlation pattern between bank shares and national indexes?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 463(C), pages 320-329.

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