Uncovered Interest Rate Parity Redux: Non- Uniform Effects

Yin-Wong Cheung and Wenhao Wang ()
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Wenhao Wang: City University of Hong Kong

No GRU_2020_004, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: An empirical model that includes proxies for unobservable factors and allows for non-uniform effects due to model uncertainty and time-varying parameters can reduce the deviation of uncovered interest rate parity (UIP) as measured by the β-estimate that captures the interest rate differential effect in UIP regressions. However, the specification that alleviated UIP failure does not reduce the variability of the β-estimate, exhibits composition changes and time-varying parameters, and varies across exchange rates. These findings collaborate the scapegoat theory, and suggest that shifting roles of explanatory variables and time-varying effects contribute to the difficulty of rectifying the empirical UIP failure.

Keywords: Dynamic Model Averaging; Model Uncertainty; Proxies for CIP Deviations, Risk Premiums and Expectational Errors; Scapegoat Theory, Time-Varying Parameters (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2020-03-20
New Economics Papers: this item is included in nep-ore
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Related works:
Journal Article: Uncovered interest rate parity redux: Non-uniform effects (2022)
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