Five Facts about the UIP Premium

Sebnem Kalemli-Ozcan and Liliana Varela

No 28923, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We introduce a new measure of currency risk for emerging markets, the UIP premium, and highlight five key insights into its cross-sectional and time-series properties. We derive the UIP premium from survey data on exchange rate expectations and show that it captures a substantial local risk factor, as evidenced by: (1) The UIP premium for emerging markets is consistently positive, higher, and more volatile than the UIP premium for advanced economies; (2) A significant portion of cross-sectional and time-series variation in the UIP premium is driven by local risk factors; (3) The interest rate differential component of the UIP premium is more volatile and strongly correlated with local risk factors; (4) Local and global risk factors influence exchange rate expectations, which closely align with actual exchange rate movements; (5) The local risk factor is associated with country-specific policy shocks, where such policy uncertainty can predict persistent expectations of depreciations.

JEL-codes: E0 F0 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-mac and nep-opm
Note: IFM
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Citations: View citations in EconPapers (17)

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