THE FAILURE OF UNCOVERED INTEREST PARITY, FORWARD BIAS AND RELATED PUZZLES

John Pippenger

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

Abstract: Three puzzles are closely related to the forward-bias puzzle and the failure of uncovered interest parity: (1) UIP failure is greater for short than long maturities, (2) forward bias is larger between developed than between developing countries and (3) there is no systematic forward bias in commodity markets. A convincing explanation for these puzzles should also explain two other 'facts': (a) the time dependency of the forward bias and failure of UIP and (b) that UIP holds better under a gold standard than under flexible rates. A combination of covered interest parity and monetary policy provides the best available explanation.

Keywords: Social and Behavioral Sciences; exchange rates; interest rates; risk premia; rational expectations; gold standard; uncovered and covered interest parity; forward bias; forward arbitrage (search for similar items in EconPapers)
Date: 2013-04-17
New Economics Papers: this item is included in nep-mon
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