Abstract
This study comparatively examined the validity of the theory of uncovered interest rate parity (UIP) for Nigeria and United States of America (USA) and for Nigeria and China, using USA and China as anchor countries respectively. The study also examined the impact of the theory (UIP) on investment in Nigeria. Using annual time series data spanning from 1980-2017, the pre-estimation test (Augmented Dickey-Fuller Unit root test) was conducted. Given that the variables were integrated of order one and order zero, Autoregressive Distributed lag bound testing approach (ARDL) and Toda- Yamamoto causality test were employed for analysis. The ARDL result indicates that there is no long run relationship between Nigeria and USA but there is a long run relationship between Nigeria and China. By implication, the theory of UIP does not hold between Nigeria and USA but between Nigeria and China, the theory of UIP holds. Also, the result of Toda-Yamamoto indicates that the theory of UIP positively and significantly impacts on investment in Nigeria. The study recommended that the government should strengthen her economic relationship especially with China so as to encourage more investments by China in Nigeria.
Highlights
With increase in trade and globalization, there is an uneven distribution of the costs and benefits
The result revealed that the theory of uncovered interest rate parity (UIP) does not hold between Nigeria and United State of America (USA)
This implies that the theory of UIP does not hold between Nigeria and United State of America (USA)
Summary
With increase in trade and globalization, there is an uneven distribution of the costs and benefits This appears to have aggravated inequalities of wealth and power within and between countries. According to Raffiee (2003), the problems of inequality of wealth and power are caused by the interest rate and exchange rate differentials (theory of uncovered interest rate parity) between countries. Interest rate parity is a no-arbitrage condition representing an equilibrium state under which investors will be indifferent to interest rates available on bank deposits in two countries. The fact that this condition does not always hold, allows for potential opportunities to earn riskless profits from covered interest arbitrage. The Uncovered Interest rate Parity (UIP) is a parity condition stating that the differences in interest rates between two countries are equal to the expected change in exchange rates between the countries‟ currencies
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