Uncovered Interest Parity and the Efficient Market Hypothesis

Imad A. Moosa and Razzaque H. Bhatti
Additional contact information
Imad A. Moosa: La Trobe University
Razzaque H. Bhatti: University of Azad Jammu and Kashmir

Chapter 4 in International Parity Conditions, 1997, pp 77-93 from Palgrave Macmillan

Abstract: Abstract The uncovered interest parity (UIP) hypothesis postulates an equilibrium relationship between the market’s expected rate of change of the spot exchange rate and the interest rate differential on perfectly substitutable domestic and foreign assets. This hypothesis stipulates that if the interest rate differential is different from the expected rate of change of the exchange rate, risk neutral agents tend to move their uncovered funds across financial markets until equality is re-established. Under the joint assumption of risk neutrality and rational expectations, another hypothesis can be derived from the CIP and UIP conditions which postulates that the forward rate (the forward premium) is equal to the market’s expectation of the future spot exchange rate (the expected rate of change of the spot exchange rate), implying (unbiased) efficiency in the forward exchange market.

Keywords: Forward Rate; Spot Rate; Foreign Exchange Market; Efficient Market Hypothesis; Interest Rate Differential (search for similar items in EconPapers)
Date: 1997
References: Add references at CitEc
Citations: View citations in EconPapers (1)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-349-25523-8_4

Ordering information: This item can be ordered from
http://www.palgrave.com/9781349255238

DOI: 10.1007/978-1-349-25523-8_4

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().