Journal of Business & Economic Policy

ISSN 2375-0766 (Print), 2375-0774 (Online) DOI: 10.30845/jbep

Interest Rate Parity Theory, Risk Premium, and Break Point: Japanese Case from The 1990s
Yutaka Kurihara

Abstract
This article examines interest rate parity theory for exchange rate determination and its break point in the 1990s sample period in Japan. Interest rate parity theory, namely, covered and uncovered interest rate parity theory, has long been used to examine foreign exchange markets. This article examines whether or not this theory holds for the recent Japanese case and whether or not there is a break point for the recent Japanese case from the 1990s to now. Using empirical analyses, the article shows that uncovered interest rate parity theory does not hold, which means that there may be a risk premium in the foreign exchange market. Moreover, there is a break point in 2011Q3. A large earthquake occurred in Japan on March 11, 2011, which damaged the country and caused strong turmoil in the Japanese financial markets.

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