Testing Uncovered Interest Parity: A Continuous-Time Approach

Enrique Sentana and Antonio Diez de los Rios

No 6516, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Nowadays researchers can choose the sampling frequency of exchange rates and interest rates. If the number of observations per contract period is large relative to the sample size, standard GMM asymptotic theory provides unreliable inferences in UIP regression tests. We specify a bivariate continuous-time model for exchange rates and forward premia robust to temporal aggregation, unlike the discrete time models in the literature. We obtain the UIP restrictions on the continuous-time model parameters, which we estimate efficiently, and propose a novel specification test that compares estimators at different frequencies. Our empirical results based on correctly specified models reject UIP.

Keywords: Exchange rates; Forward premium puzzle; Hausman test; Interest rates; Orstein-uhlenbeck process; Temporal aggregation (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: TESTING UNCOVERED INTEREST PARITY: A CONTINUOUS‐TIME APPROACH (2011)
Working Paper: Testing Uncovered Interest Parity: A Continuous-Time Approach (2007)
Working Paper: Testing Uncovered Interest Parity: A Continuous-Time Approach (2007)
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