A new test for market efficiency and uncovered interest parity

Richard T. Baillie, Francis Diebold, George Kapetanios and Kun Ho Kim

Journal of International Money and Finance, 2023, vol. 130, issue C

Abstract: We suggest a new single-equation test for Uncovered Interest Parity () based on a dynamic regression approach. The method provides consistent and asymptotically efficient parameter estimates, and is not dependent on assumptions of strict exogeneity. This new approach is asymptotically more efficient than the common approach of using OLS with HAC robust standard errors in the static forward premium regression. The coefficient estimates when spot return changes are regressed on the forward premium are all positive and remarkably stable across currencies. These estimates are considerably larger than those of previous studies, which frequently find negative coefficients. The method also has the advantage of showing dynamic effects of risk premia, or other events that may lead to rejection of UIP or the efficient markets hypothesis.

Keywords: Dynamic regressions; Forward premium anomaly; Robust standard errors; Uncovered interest parity (search for similar items in EconPapers)
JEL-codes: C22 C31 (search for similar items in EconPapers)
Date: 2023
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/S0261560622001681
Full text for ScienceDirect subscribers only

Related works:
Working Paper: A New Test for Market Efficiency and Uncovered Interest Parity (2022)
Working Paper: A New Test for Market Efficiency and Uncovered Interest Parity (2022)
Working Paper: A New Test forMarket Efficiency and Uncovered Interest Parity (2022)
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:jimfin:v:130:y:2023:i:c:s0261560622001681

DOI: 10.1016/j.jimonfin.2022.102765

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

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