Does the Uncovered Interest Parity Hold? Evidence for Central and Eastern European Countries

Deng-kui Si (), Chi-Wei Su (), Kuo-Ming Lu () and Shuh-Chyi Doong
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Deng-kui Si: Department of Finance, Wuhan University, Wuhan, Hubei, China
Chi-Wei Su: Department of Finance, Ocean University of China, Shandong, China
Kuo-Ming Lu: Department of Finance, National Chung Hsing University, Taichung, Taiwan

Economic Research Guardian, 2017, vol. 7, issue 1, 24-39

Abstract: This study applies nonlinear quantile unit root test with Fourier function to test the validity of long-run uncovered interest parity (UIP) to assess the non-stationary properties of the interest differentials convergence for ten Central and Eastern European (CEE) countries. We find that our approximation has higher power to detect U-shaped breaks and smooth breaks than linear method if the true data generating process of risk premium convergence is in fact a stationary non-liner process. We examine the validity of UIP from the non-linear point of view and provide robust evidence clearly indicate that UIP holds true for six CEE countries. Our findings point out the risk premium adjustments of the six CEE countries are mean reversion towards UIP equilibrium values in a non-linear way.

Keywords: Quantile Unit Root Test; Structural Change; Trend Breaks; Uncovered Interest Parity (search for similar items in EconPapers)
JEL-codes: C22 F36 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:wei:journl:v:7:y:2017:i:1:p:24-39

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