Testing the interest-parity condition with Irving Fisher's example of Indian rupee and sterling bonds in the London financial market, 1869–1906. (10th January 2019)

• Record Type: Journal Article
• Authors: Herger, Nils
• Is Part Of: Financial history review. Volume 26:Number 1(2019)
• Page Start: 21
• Page End: 42
• Publication Date: 2019-01-10
• Subjects: India, -- Irving Fisher, -- silver currency, -- uncovered interest parity, -- UIP puzzle; F31, -- N13, -- N23; Finance -- History -- Periodicals; Banks and banking -- History -- Periodicals; Banks and banking -- Europe -- History -- Periodicals; 330.09
• DOI: 10.1017/S0968565018000100
• Languages: English
• ISSNs: 0968-5650

Abstract

Abstract : Following the pioneering work of Irving Fisher, this article assesses the uncovered interest-parity (UIP) condition by comparing Indian interest and exchange rates during the 1869 to 1906 period. The Indian case provides a good example of the UIP condition, since Indian rupee and sterling bonds were simultaneously traded in the London financial market and subject to negligible default risks. Large deviations from the UIP condition arose when India suffered from pervasive levels of uncertainty about the future of its silver-based currency system. Otherwise, a relatively close correlation arises between sterling-to-rupee interest-rate differences and exchange-rate changes.