How Do Interest Rates and Exchange Rates Interact

Authors

  • Yueqi Wang

DOI:

https://doi.org/10.61173/fnevy781

Keywords:

interest rate, exchange rate, relationship, LIBOR, SOFR

Abstract

This research aims to explore the relationship between interest rates and exchange rates from theoretical interactions to concrete linear relationships. Interest rate parity theory plays an important role in this topic, where forward discounts and forward premiums are discussed. What’s more, by analyzing the interest rate and exchange rate data of the countries using LIBOR, this study seeks changes in the correlation between interest rates and forward premium/discount before and after the cancellation of LIBOR. The reasons for switching from LIBOR to SOFR are also analyzed. The expected outcome includes, providing that how do interest rates and exchange rates interact, whether the removal of LIBOR has affected market efficiency.

References

[1] Benigno, Gianluca, and Pierpaolo Benigno. “Exchange rate determination under interest rate rules.” Journal of international Money and Finance 27.6 (2008): 971-993.

[2] Hamrita, Mohamed Essaied, and Abdelkader Trifi. “The relationship between interest rate, exchange rate and stock price: A wavelet analysis.” International journal of economics and financial issues 1.4 (2011): 220-228.

[3] Scott Hacker, R., Hyunjoo Kim Karlsson, and Kristofer Månsson. “The relationship between exchange rates and interest rate differentials: a wavelet approach.” The World Economy 35.9 (2012): 1162-1185.

[4] Liu, Tie‐Ying, and Chien‐Chiang Lee. “Exchange rate fluctuations and interest rate policy.” International Journal of Finance & Economics 27.3 (2022): 3531-3549.

[5] Abrantes-Metz, Rosa M., Sofia B. Villas-Boas, and George Judge. “Tracking the Libor rate.” Applied Economics Letters 18.10 (2011): 893-899.

[6] Duffie, Darrell, and Jeremy C. Stein. “Reforming LIBOR and other financial market benchmarks.” Journal of Economic Perspectives 29.2 (2015): 191-212.

[7] Aliber, Robert Z. “The interest rate parity theorem: A reinterpretation.” Journal of political economy 81.6 (1973): 1451-1459.

[8] Du, Wenxin, Alexander Tepper, and Adrien Verdelhan. “Deviations from covered interest rate parity.” The Journal of Finance 73.3 (2018): 915-957.

Downloads

Published

2024-12-31

Issue

Vol. 2 No. 6 (2024): Volume 2, Issue 6

Section

Articles

License

Copyright (c) 2024 by the authors.

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.