Uncovered interest parity tests and exchange rate expectations

Philip Marey ()

No 54, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: We show that in a representative agent model with a constant risk premium, the uncovered interest parity (UIP) test coefficient can be expressed as a function of the variables and parameters of the prevailing exchange rate expectations mechanism. Taking into account the market microstructure, the robustness of this relationship is confirmed by simulations with a multi-agent model containing a time-varying risk premium. Distributed lag expectations are able to explain the often large negative values for UIP-test-coefficients usually found in empirical studies, while bandwagon expectations are able to explain more recent findings of UIP-test-coefficients larger than one. Regressive expectations generate positive values, both smaller and larger than one. Adaptive expectations are able to generate the whole spectrum of empirical values.

Keywords: exchange rate expectations; uncovered interest parity; market microstructure (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:54

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