EconPapers    
Economics at your fingertips  
 

Use of (Time-Domain) Vector Autoregressions to Test Uncovered Interest Parity

Takatoshi Ito ()

No 1493, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, a vector autoregression model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market. Consider a VAR system of the spot exchange rate (yen/dollar), the domestic (US) interest rate and the foreign (Japanese) interest rate, describing the interdependence of the domestic and international financia lmarkets. Uncovered interest parity is stated as a null hypothesis that the current difference between the two interest rates is equal to the difference between the expected future (log of) exchange rate and the (log of) current spot exchange rate. Note that the VAR system will yield the expected future spot exchange rate as a k-step ahead unconditional prediction. Hence, the null hypothesis is stated as nonlinear cross-equational restrictions for the three-equation VAR system. Then UIP is tested by the Wald test between the unrestricted and restricted systems. A test of UIP with a maintained hypothesis of covered interest parity, becomes a hypothesis test of efficiency without risk premium, that is,the forward exchange rate isthe unbiased predictor of the future spot exchange rate, and information is efficiently used in its prediction. Our results are compared to the efficiency test with a single equation using the Hansen-Hodrick procedure for the same data set.

Date: 1984-11
Note: ME ITI IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Published as The Review of Economics and Statistics, Vol. LXX, No. 2, (May 1988), pp. 29 6-305.

Downloads: (external link)
http://www.nber.org/papers/w1493.pdf (application/pdf)

Related works:
Journal Article: Use of (Time-Domain) Vector Autoregressions to Test Uncovered Interest Parity (1988) Downloads
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:nbr:nberwo:1493

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w1493

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2019-08-11
Handle: RePEc:nbr:nberwo:1493