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Uncovered interest parity puzzle: Asymmetric responses

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  • Lee, Byung-Joo

Abstract

This paper estimates UIP slope parameters using a large number of cross-country bilateral exchange rates from a broad spectrum of developed and developing countries. Empirical evidence shows that short-term (one month) UIP holds well, and the failure of UIP is largely due to the key currency bias. UIP fails more often when a key currency is involved in bilateral exchange rate especially when a key currency offers higher return on capital than when only non-key currencies are involved. This paper also presents empirical evidence for state-dependent asymmetric responses in exchange rate changes depending on the direction of forward premium.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 27 (2013)
Issue (Month): C ()
Pages: 238-249

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Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:238-249

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Web page: http://www.elsevier.com/locate/inca/620165

Related research

Keywords: Uncovered interest parity; Key currency bias; Asymmetric UIP;

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References

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Cited by:
  1. Reher, Gerrit & Wilfling, Bernd, 2014. "The valuation of European call options on zero-coupon bonds in the run-up to a fixed exchange-rate regime," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 483-496.
  2. Aysun, Uluc & Lee, Sanglim, 2014. "Can time-varying risk premiums explain the excess returns in the interest rate parity condition?," Emerging Markets Review, Elsevier, vol. 18(C), pages 78-100.

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