Uncovered Interest Rate Arbitrage: A Test of the Efficiency of Costa Rica Deposit Accounts
International Journal of Finance, Vol. 18, No. 1, pp. 3861-3887, 2006
Posted: 29 Aug 2009 Last revised: 4 Mar 2010
Date Written: 2006
The efficiency of the Costa Rica certificate of deposit (CD) market is examined in this paper. The rate spread between US dollar denominated CDs in US. and Costa Rica banks are examined. Colon denominated rates offered by Costa Rican banks are compared to dollar denominated rates offered by U. S. and Costa Rica banks. Contrary to expectations, Costa Rican banks are found to commonly pay lower rates than U.S. banks on dollar denominated CDs. Traditional tests and a new test based on the Wald-Wolfowitz runs test are conducted to detect uncovered interest rate arbitrage opportunities.
Keywords: Costa Rica, Interest Rates, Uncovered Interest Rate Arbitrage
JEL Classification: G30
Suggested Citation: Suggested Citation