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Testing the uncovered interest parity using traded volatility, a time-varying risk premium and heterogeneous expectations

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  • Sarantis, Nicholas
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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 25 (2006)
    Issue (Month): 7 (November)
    Pages: 1168-1186

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    Handle: RePEc:eee:jimfin:v:25:y:2006:i:7:p:1168-1186

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    Web page: http://www.elsevier.com/locate/inca/30443

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    References

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    1. Fisher, P G, et al, 1990. "Econometric Evaluation of the Exchange Rate in Models of the UK Economy," Economic Journal, Royal Economic Society, vol. 100(403), pages 1230-44, December.
    2. Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971 Elsevier.
    3. Cavaglia, Stefano M F G & Verschoor, Willem F C & Wolff, Christian C P, 1994. "On the Biasedness of Forward Foreign Exchange Rates: Irrationality or Risk Premia?," The Journal of Business, University of Chicago Press, vol. 67(3), pages 321-43, July.
    4. Flood, Robert P & Rose, Andrew K, 1998. "Understanding Exchange Rate Volatility Without the Contrivance of Macroeconomics," CEPR Discussion Papers 1944, C.E.P.R. Discussion Papers.
    5. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    6. Geert Bekaert & Robert J. Hodrick, 1991. "On Biases in the Measurement of Foreign Exchange Risk Premiums," NBER Working Papers 3861, National Bureau of Economic Research, Inc.
    7. Ian Marsh & Menzie Chinn & Yin-Wong Cheung, 1999. "How do UK-Based Foreign Exchange Dealers Think Their Market Operates?," Working Papers wp99-21, Warwick Business School, Finance Group.
    8. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
    9. Berk, Jan Marc & Knot, Klaas H. W., 2001. "Testing for long horizon UIP using PPP-based exchange rate expectations," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 377-391, February.
    10. Lyons, Richard K., 1988. "Tests of the foreign exchange risk premium using the expected second moments implied by option pricing," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 91-108, March.
    11. Yin-Wong Cheung & Menzie D. Chinn, 1999. "Macroeconomic Implications of the Beliefs and Behavior of Foreign Exchange Traders," NBER Working Papers 7417, National Bureau of Economic Research, Inc.
    12. Hall, S G, 1993. "Modelling the Sterling Effective Exchange Rate Using Expectations and Learning," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(3), pages 270-86, September.
    13. Kenneth A. Froot, 1990. "Short Rates and Expected Asset Returns," NBER Working Papers 3247, National Bureau of Economic Research, Inc.
    14. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
    15. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
    16. Wickens, Michael R, 1982. "The Efficient Estimation of Econometric Models with Rational Expectations," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 55-67, January.
    17. Kim, Inbae & Salemi, Michael K., 2000. "Estimation and simulation of risk premia in equity and foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 561-582, August.
    18. Marston, Richard C., 1997. "Tests of three parity conditions: Distinguishing risk premia and systematic forecast errors," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 285-303, April.
    19. MacDonald, Ronald & Torrance, Thomas S, 1990. "Expectations Formation and Risk in Four Foreign Exchange Markets," Oxford Economic Papers, Oxford University Press, vol. 42(3), pages 544-61, July.
    20. Wolff, Christian C. P., 2000. "Measuring the forward foreign exchange risk premium: multi-country evidence from unobserved components models," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(1), pages 1-8, January.
    21. MacDonald, Ronald, 2000. " Expectations Formation and Risk in Three Financial Markets: Surveying What the Surveys Say," Journal of Economic Surveys, Wiley Blackwell, vol. 14(1), pages 69-100, February.
    22. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June.
    23. Baillie, Richard T. & Bollerslev, Tim, 2000. "The forward premium anomaly is not as bad as you think," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 471-488, August.
    24. Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
    25. Flood, Robert P. & Marion, Nancy P., 2000. "Self-fulfilling risk predictions:: an application to speculative attacks," Journal of International Economics, Elsevier, vol. 50(1), pages 245-268, February.
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    Cited by:
    1. Tse, Yiuman & Wald, John K., 2013. "Insured uncovered interest parity," Finance Research Letters, Elsevier, vol. 10(4), pages 175-183.
    2. Martin Grandes & Marcel Peter & Nicolas Pinaud, 2010. "Pricing the Currency Premium Under Flexible Exchange Rates: Evidence from South Africa," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(60), pages 7-52, October -.
    3. Pippenger, John, 2012. "What Covered Interest Parity Implies about the Theory of Uncovered Interest Parity," University of California at Santa Barbara, Economics Working Paper Series qt0zk6t2hj, Department of Economics, UC Santa Barbara.
    4. Pippenger, John, 2011. "A Complete Solution To The Forward-Bias Puzzle," University of California at Santa Barbara, Economics Working Paper Series qt5gq9z4j0, Department of Economics, UC Santa Barbara.
    5. Kellard, Neil & Dunis, Christian & Sarantis, Nicholas, 2010. "Foreign exchange, fractional cointegration and the implied-realized volatility relation," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 882-891, April.
    6. Michael Jetter & Alex Nikolsko-Rzhevskyy, 2013. "Monetary Policy Shifts and the Forward Discount Puzzle," DOCUMENTOS DE TRABAJO CIEF 010729, UNIVERSIDAD EAFIT.
    7. Carmen Gloria Silva, 2010. "Forward premium puzzle and term structure of interest rates: the case of New Zealand," Working Papers Central Bank of Chile 570, Central Bank of Chile.

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