Uncovered interest parity puzzle: Asymmetric responses

Byung-Joo Lee ()

International Review of Economics & Finance, 2013, vol. 27, issue C, 238-249

Abstract: This paper estimates UIP slope parameters using a large number of cross-country bilateral exchange rates from a broad spectrum of developed and developing countries. Empirical evidence shows that short-term (one month) UIP holds well, and the failure of UIP is largely due to the key currency bias. UIP fails more often when a key currency is involved in bilateral exchange rate especially when a key currency offers higher return on capital than when only non-key currencies are involved. This paper also presents empirical evidence for state-dependent asymmetric responses in exchange rate changes depending on the direction of forward premium.

Keywords: Uncovered interest parity; Key currency bias; Asymmetric UIP (search for similar items in EconPapers)
JEL-codes: F31 F41 G15 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:27:y:2013:i:c:p:238-249

DOI: 10.1016/j.iref.2012.10.004

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