Uncovered Interest Parity and the Risk Premium

Dandan Li, Atanu Ghoshray and Bruce Morley
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Dandan Li: University of Bath

No 02/11, Department of Economics Working Papers from University of Bath, Department of Economics

Abstract: The aim of this study is to analyze the potential risk premium inherent in the uncovered interest parity (UIP) condition. In this approach the GARCH class models, including Component GARCH are used to measure the time-varying risk premium and the results show that it is significant in most countries studied in this analysis. This suggests that risk is an important part of modeling exchange rates and needs to be considered in both empirical and theoretical models. In general, the results suggest emerging countries work better in terms of UIP and the risk premium than developed countries.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eid:wpaper:24072

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