A rank approach for studying cross-currency bases and the covered interest rate parity

Abstract

We use a panel rank cointegration approach to check for the stability conditions of the cross-country money market interest rate basis.Using weekly information on short-term interest rates and spot and forward exchange rates for a set of 20 European economies between 2005 and 2017, we show that in most cases these bases are non-stationary, implying the failure of the covered interest rate parity condition. Concretely, a mean-reverting behavior is encountered in only two cases. The first includes Greece, Italy and Portugal, while the second Belgium, France and Germany.