Uncovered Interest Parity and Financial Market Volatility

Alexandra Horobet (alexandra.horobet@gmail.com), Sorin Dumitrescu (sorin.dumitrescu@rei.ase.ro) and Dan Gabriel Dumitrescu (dandumiase@gmail.com)
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Alexandra Horobet: Bucharest Academy of Economic Studies, Romania
Sorin Dumitrescu: Bucharest Academy of Economic Studies, Romania
Dan Gabriel Dumitrescu: Bucharest Academy of Economic Studies, Romania

Romanian Economic Journal, 2009, vol. 12, issue 32, 21-45

Abstract: Our paper addresses the relationship between exchange rates changes and interest rate differentials in the UIP framework, by taking into account capital market and foreign exchange market volatility. We use eight currencies, of which five are Central and Eastern European and three are developed markets currencies, and their relationship to the US dollar. We use OLS regressions to capture the influence of volatility on UIP testing. We find that UIP is not validated, overall and in times of high volatility, but the direction in the exchange rate change indicated by the interest rate differential follows the UIP framework. The relationship between interest rate differentials and exchange rates changes is weak and taking into account market volatility does not significantly alter our results.

Keywords: exchange rates; volatility; uncovered interest parity (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rej:journl:v:12:y:2009:i:32:p:21-45

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