The uncovered return parity condition

Lorenzo Cappiello and Roberto De Santis ()

No 812, Working Paper Series from European Central Bank

Abstract: This paper proposes an equilibrium relationship between expected exchange rate changes and differentials in expected returns on risky assets. We show that when expected returns on a risky asset in a certain economy are higher than the returns that are expected from investing in a risky asset in another economy, then the currency corresponding to the economy whose asset offers higher returns is expected to depreciate. Due to its similarity with Uncovered Interest Parity (UIP), we call this equilibrium condition "Uncovered Return Parity" (URP). However, in the URP condition returns' differentials are not known ex ante, while in the UIP they are. The paper finds empirical support in favour of URP for certain markets over some sample periods. JEL Classification: F30, F31, G12, C32

Keywords: GMM.; stochastic discount factor; Uncovered interest parity; Uncovered Return Parity (search for similar items in EconPapers)
Date: 2007-09
Note: 234084
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp812.pdf (application/pdf)

Related works:
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:ecb:ecbwps:2007812

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().