The Risk-Adjusted Interest Rate Parity: Panel Data Evidence

Abdulnasser Hatemi-J and Per-Ola Maneschiöld ()
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Per-Ola Maneschiöld: Halmstad University, School of Business and Engineering, Department of Economics, Postal: Box 823 S-301 18 Halmstad Sweden, http://www.hh.se/

Economia Internazionale / International Economics, 2004, vol. 57, issue 1, 1-10

Abstract: The interest rate parity relationship is analysed with and without the inclusion of a time-varying risk premium. A panel data set of returns on Eurocurrency deposits is used to test for a panel unit root as well as for common movements in the risk premia across deposits denominated in different currencies. The results showed that each variable in the panel is stationary. The main empirical finding is that the UIP is not supported for any country in the sample except perhaps for Japan indicating support for the Risk-adjusted uncovered interest parity model but not for the UIP without a risk premium included. That evidence is then regarded as support for the Risk-adjusted UIP assumption underlying the Portfolio model of exchange rate determination.

Keywords: Eurocurrency; Interest rate parity; Panel unit root test; Risk premia (search for similar items in EconPapers)
JEL-codes: C33 F30 F31 (search for similar items in EconPapers)
Date: 2004
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