Talk:Interest rate parity

Latest comment: 8 years ago by ExpertIdeasBot in topic Dr. Benassy-Quere's comment on this article
Good articleInterest rate parity has been listed as one of the Social sciences and society good articles under the good article criteria. If you can improve it further, please do so. If it no longer meets these criteria, you can reassess it.
Article milestones
DateProcessResult
October 6, 2012Good article nomineeListed

Radical rewrite in progress

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This article is poorly written and essentially unreferenced. The forward price article was of equally poor quality and said little to nothing about forward exchange rates which redirected to it. I have since eliminated that redirect and wrote a new forward exchange rate article that is well-referenced (however to be fair, it is in its initial stages) that begins tying into CIRP. I'm going to begin rewriting the interest rate parity article as well, because as it stands it just jumps into formulas for the two types of interest rate parity and then runs the reader through some questionable and convoluted examples - this article really doesn't say a whole lot about what CIRP and UIRP actually are, or why they're relevant - the little it does say is unsubstantiated conjecture, leaving the article dreadfully inaccurate and useless to any layman. Anyone willing to help is more than welcome. I'm trying to radically rewrite international finance & economics articles that presently don't even come close to adhering to Wikipedia's core content policies: WP:NOR, WP:V, & WP:NPOV. Most of the key references for IRP will need to be textbooks and scholarly articles published in peer-reviewed academic journals. I intend to clean up this talk page as well, since the posts are haphazardly scattered and unsigned. John Shandy`talk 03:33, 26 June 2011 (UTC)Reply

I have radically rewritten the article as a start. I think it is a great improvement, because it not only presents the equations, but it explains what the conditions are, what the variables are, what the relationships mean and so forth. I didn't throw in a ton of numerical examples, because I think it's unnecessary and extraneous to understanding the relationships. I felt the previous examples that ran through calculations didn't really help anyone, especially not any laymen, understand the parity conditions. We can perhaps introduce simpler examples later on, but I think it unnecessary and unclean for now. John Shandy`talk 04:33, 29 June 2011 (UTC)Reply

Questions

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  • In the "Uncovered interest rate parity" paragraph you denominate dollar as a domestic currency, while the graphic on the side suggests euro is a domestic currency (euro is in denominator). This (I guess) introduced a confusion to the equation in the following way: if dollar is a domestic currency and returns on dollar deposits (1+r(domestic)) are to be expressed in terms of foreign currency they need to be multiplied by expected future exchange rate and not spot rate (i first invest domesticaly then convert in the future). If one instead converts domestic currency (dollar) into euro (foreign) first and then invest into foreign assets the return foreign assets generate are to be mulitplied by current (spot) exchange rate, when investor makes a decision to invest. — Preceding unsigned comment added by Tvpaker (talkcontribs) 14:19, 15 December 2014 (UTC)Reply
The domestic/foreign distinction is rather unnecessary so maybe I should remove it and just keep the text focused on "dollar vs euro." Regardless of which currency is the starting point however, you would convert today at today's spot, invest abroad, and later convert back at the future spot rate. If you invest domestically (with domestic currency), there is no conversion at all. John Shandy`talk 01:24, 15 January 2015 (UTC)Reply
  • I was looking around for Good Article Nominees to review, and came across this one. I'd be inclined to review it if the article said something about who uses this concept. Currency traders? Businesses? Governments? What is it used for? Why is it good or bad when it happens? I just can't relate and so I think I would be a poor reviewer until the article at least touches on these questions. —Cupco 22:15, 2 September 2012 (UTC)Reply
You bring up an interesting concern. At present, you can probably gain better insight as to its importance by taking a look at Covered interest arbitrage and Uncovered interest arbitrage. Interest rate parity, in its various forms, is the condition under which such arbitrage opportunities are either not possible or not feasible for investors (which include individuals and public or private institutions). I guess I didn't think to have the article devote much text to clarifying this. I probably felt that "no-arbitrage condition" was sufficient, as IRP is more a technical mechanism that A) offers insight to determining the future spot and forward exchange rates, and B) has implications for strategies employed by arbitrageurs and risk managers.
I will have to do some thinking about how to improve the article on this front, which may take some time as I have some distractions this week such as jury duty. I think I have about 4 or so other GA nominees if you care to take a look at any of them. John Shandy`talk 01:49, 3 September 2012 (UTC)Reply
  • This is the english (language) version, not the us-american (national) version. In that sense, shouldn't dollar be replaced by domestic in the first paragraph of "Uncovered interest rate parity" (and possibly elsewhere)?
While I have great appreciation for countering systemic bias in the English Wikipedia, I do not consider it biased to select actual currencies for use in examples and explanations. I think that doing so avoids unnecessary abstraction by offering concrete representations. Furthermore, most of the sources cited actually use specific currencies in their prose and their examples (essentially all of the textbooks I've cited in the article tend to use the USD and EUR when demonstrating IRP, and frequently use USD, EUR, GBP, and JPY throughout). The lead paragraph emphasizes domestic and foreign while the uncovered and covered sections use specific currencies to accompany the diagrams I made. John Shandy`talk 21:07, 13 January 2013 (UTC)Reply

Note:

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This is nothing much more then opcion costing (not pricing), and derivative costing. All nations are communist upto a certain level, and that implies that all nations exert COST controls to inhibit end drain capital marauding cycles. The USofA is NO different than any other, the primary reason for them doing that better NOT being that they really DO that better, but that they are as yet NOT superpopulous due their own creations in excess. — Preceding unsigned comment added by 201.208.189.225 (talk) 13:57, 10 October 2014 (UTC)Reply

Peer review

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Should we subject this article to peer review? Lbertolotti (talk) 15:16, 12 August 2015 (UTC)Reply

Dr. Benassy-Quere's comment on this article

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Dr. Benassy-Quere has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:


- the article refers to "uncovered interest rate parity" rather than "interest rate parity" which refers to both covered and uncovered interest rate parity. "the interest rate parity condition implies that the expected return on domestic assets will equal the exchange rate-adjusted expected return on foreign currency assets" --> uncovered interest parity, whereas "the interest rate parity condition implies that the expected return on domestic assets will equal the forward-premium-adjusted return on foreign currency assets".

- "under which investors will be indifferent to interest rates available on bank deposits in two countries": not necesarily bank deposits, but any class of assets (eg. bonds of similar maturity and risk). - "When uncovered interest rate parity and purchasing power parity hold together, they illuminate a relationship named real interest rate parity, which suggests that expected real interest rates represent expected adjustments in the real exchange rate": not true. If purchasing power parity holds, then the real exchange rate is constant, so there is no "expected adjustments in the real exchange rate". - "St is the current spot exchange rate at time t": add "number of dollars in one foreign currency unit, i.e. St increases whenever the foreign currency appreciates vis-a-vis the dollar". This first equation is valid only if k=1 year (or if interest rates are not expressed as annual returns). Otherwise, (1+i) must be elevated to power k. in the linearized version, i must be replaced by ki. - covered interest parity: now no horizon k is specified, so implicitly the relationship is given for a year's horizon. This is not consistent with the presentation of the uncovered interest parity. It leads later to Ft=Et(St+k) which should in fact be Ft,k=Et(St+k), where Ft,k is the forward exchange rate set in t for horizon t+k. - "Researchers demonstrated that if a central bank manages interest rate spreads in strong response to the previous period's spreads, that interest rate spreads had negative coefficients in regression tests of UIRP.": I think this statement (and the following) cannot be understood without showing an discussing the standard no-bias estimation technique. Then, this section could be summarized more efficiently. - "When both UIRP (particularly in its approximation form) and purchasing power parity (PPP) hold, the two parity conditions together reveal a relationship among expected real interest rates, wherein changes in expected real interest rates reflect expected changes in the real exchange rate.". Replace the last part of the sentence by "wherein expected real interest rates are equalized". (with PPP the real exchange rate is constant).

- The standard test of uncovered interest parity is a double test concerning UIP itself but also exchange-rate expectations. The standard assumption is that they are rational. But some scholars (i.e. Ronald MacDonald) have tested the relationship with survey data.


We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Benassy-Quere has expertise on the topic of this article, since he has published relevant scholarly research:


  • Reference : Agnes Benassy-Quere & Sophie Bereau & Valerie Mignon, 2009. "The Dollar in the Turmoil," Working Papers 2009-08, CEPII research center.

ExpertIdeasBot (talk) 15:48, 24 August 2016 (UTC)Reply