February 03, 2014

Purchasing Power Parity and Interest Rate Parity have very clear implications. Under such idealized conditions, we expect that in an unfettered free market, real rates of returns will be equalized. Add tax rates, regulations, and/or transportation costs, and we can easily explain how economic disturbances give rise to deviation from purchasing power and interest rate parity, which are correlated to the stock market relative performance.

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