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Uncovered Interest Parity and the USD/COP Echange Rate

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Peter Rowland ()
Abstract

This paper test the uncovered interest parity (UIP) hypothesis for the USD/COP exchange rate, using weekly data for the period from january 1994, when Colombia introduced its crawling band exchange rate regime, to august 2002. The study yields several interesting results. For the period october 1996 to august 2002 the UIP hypothesis receives relatively strong support, even if this is weakened towards the end of the period.This is in stark contrast with the almost unanimous rejection of UIP shown by the literature. UIP is, furthermore, tested for a duration of time of 3, 6 and 12 months, and in line with other studies, the validity of the UIP relationship increases with the term of the investmente. However, we suspect that the strong support for UIP might be a temporary ocurrence due to the fact that Colombia during this period went throught a considerable macroeconomic transition, where a hight rate of inflation were brought down from double- digit to single-digit levels.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 227.

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  3. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March. [Downloadable!] (restricted)
  4. Longworth, David, 1981. "Testing the Efficiency of the Canadian-U.S. Exchange Market under the Assumption of no Risk Premium," Journal of Finance, American Finance Association, vol. 36(1), pages 43-49, March. [Downloadable!] (restricted)
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  7. Berk, Jan Marc & Knot, Klaas H W, 2001. "The Term Structure of UIP: Evidence from Survey Data," Applied Economics Letters, Taylor and Francis Journals, vol. 8(7), pages 459-62, July. [Downloadable!] (restricted)
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  9. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
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  12. Boyer, Russell S & Adams, F Charles, 1988. "Forward Premia and Risk Premia in a Simple Model of Exchange Rate Determination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 633-44, November. [Downloadable!] (restricted)
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  14. Wu, Jyh-Lin, 1999. "A re-examination of the exchange rate-interest differential relationship: evidence from Germany and Japan," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 319-336, February. [Downloadable!] (restricted)
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  20. Kenneth A. Froot, 1990. "Short Rates and Expected Asset Returns," NBER Working Papers 3247, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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