Differences in real interest rates and transaction costs

What is it about?

Equality of ex ante real interest rates is investigated allowing for variations within a transaction costs band. Transaction costs are estimated in foreign exchange markets and in Eurocurrency markets directly from the bid–ask spreads. Two one-sided t tests show that observed transaction costs are too small to account for differences among real interest rates. Moreover, there is a clear evidence that transaction costs tend to decrease overtime.

Featured Image

Why is it important?

This paper goes beyond the previous literature by investigating equality among real interest rates allowing for variations within a transaction costs band. Transaction costs are estimated in foreign exchange markets and Eurocurrency markets from the bid–ask spreads. Two one-sided t tests (TOST) methodology is used to investigate whether transaction costs are large enough to account for differences among national real interest rates