A New Test for Market Efficiency and Uncovered Interest Parity

Richard Baillie, Francis Diebold, George Kapetanios and Kun Ho Kim

No 30638, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We suggest a new single-equation test for Uncovered Interest Parity (UIP) based on a dynamic regression approach. The method provides consistent and asymptotically efficient parameter estimates, and is not dependent on assumptions of strict exogeneity. This new approach is asymptotically more efficient than the common approach of using OLS with HAC robust standard errors in the static forward premium regression. The coefficient estimates when spot return changes are regressed on the forward premium are all positive and remarkably stable across currencies. These estimates are considerably larger than those of previous studies, which frequently find negative coefficients. The method also has the advantage of showing dynamic effects of risk premia, or other events that may lead to rejection of UIP or the efficient markets hypothesis.

JEL-codes: C22 F30 (search for similar items in EconPapers)
Date: 2022-11
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Published as Richard T. Baillie & Francis X. Diebold & George Kapetanios & Kun Ho Kim, 2023. "A new test for market efficiency and uncovered interest parity," Journal of International Money and Finance, vol 130.

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Related works:
Journal Article: A new test for market efficiency and uncovered interest parity (2023)
Working Paper: A New Test for Market Efficiency and Uncovered Interest Parity (2022)
Working Paper: A New Test forMarket Efficiency and Uncovered Interest Parity (2022)
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