Estimating the precise form of uncovered interest parity under the Stock–Watson dynamic OLS approach

Yimin Wu

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: The standard uncovered interest parity (UIP) – a logarithm version – is inappropriate for currencies with a high-interest rate because the high-interest rate (i) does not satisfy the ln(1+i)=i condition. Therefore, we develop a precise form of UIP and evaluate its existence using BRICS countries as an example. The Stock–Watson dynamic ordinary least squares (DOLS) approach based on a panel cointegration test provides individual and group estimation, finding that UIP holds for all BRICS members except for China. This implies that the financial markets of other four economies are fully integrated with the United States financial market.

Keywords: Uncovered interest parity; Dynamic ordinary least square; Panel cointegration; BRICS (search for similar items in EconPapers)
JEL-codes: C22 F31 F41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s154461232400953x

DOI: 10.1016/j.frl.2024.105923

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