Uncovered interest rate parity redux: Non-uniform effects

Yin-Wong Cheung and Wenhao Wang

Journal of Empirical Finance, 2022, vol. 67, issue C, 133-151

Abstract: Based on the β-estimate that captures the interest rate differential effect in uncovered interest rate parity (UIP) regressions, we show that an empirical model that includes proxy variables for unobservable factors and allows for variables to have time-varying weights and parameters can reduce the UIP deviation. However, the specification that alleviated UIP failure does not reduce the variability of the β-estimate. The explanatory variables exhibit time-varying coefficient estimates and shifting importance across exchange rates. These findings corroborate the scapegoat theory and suggest that the difficulty of rectifying the empirical UIP failure can be attributable to the shifting roles of explanatory variables and time-varying parameter effects.

Keywords: Dynamic model averaging; Model uncertainty; Proxy variables for CIP deviations; Risk premiums and expectational errors; Scapegoat theory; Time-varying parameters (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539822000317
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Uncovered Interest Rate Parity Redux: Non- Uniform Effects (2020)
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:eee:empfin:v:67:y:2022:i:c:p:133-151

DOI: 10.1016/j.jempfin.2022.03.008

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().