Uncovered interest parity: it works, but not for long

Alain P. Chaboud and Jonathan Wright
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Alain P. Chaboud: https://www.federalreserve.gov/econres/alain-chaboud.htm

No 752, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The failure of uncovered interest parity can be ascribed to the existence of a risk premium. The size of this risk premium may shrink to zero over sufficiently small intervals of time. In contrast, because no interest is paid on intradaily positions and interest is instead paid discretely at the point when a position is rolled over from one day to the next, the size of the interest differential remains fixed over any interval that covers the time of the discrete interest payment. This is true no matter how short that interval is. Using a large dataset of high frequency exchange rate data, we run uncovered interest parity regressions over different time intervals. We replicate the rejection of the uncovered interest parity hypothesis with daily data, but find results that are consistently much more supportive of the uncovered interest parity hypothesis over short windows of intradaily data that span the time of the discrete interest payment.

Keywords: Interest rates; Foreign exchange rates (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-rmg
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Citations: View citations in EconPapers (12)

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Journal Article: Uncovered interest parity: it works, but not for long (2005)
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