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Long Horizon Uncovered Interest Parity Re-Assessed

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  • Menzie D. Chinn
  • Saad Quayyum

Abstract

We review the evidence for both short and long horizon uncovered interest parity (UIP) and rational expectations over the period up to 2011, extending the sample examined in Chinn and Meredith (2004) by nearly a decade. We find that the joint hypothesis of UIP and rational expectations (known as the unbiasedness hypothesis) holds better at long horizons than at short, although the effect is somewhat weaker than documented in Chinn and Meredith (2004). Using the formula for the slope coefficient, we identify potential sources for the difference in slope coefficients at different horizons. We attribute our weaker findings for long horizon unbiasedness for certain currencies partly to the advent of extraordinarily low interest rates associated with the zero interest bound in Japan and Switzerland.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18482.

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Date of creation: Oct 2012
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Handle: RePEc:nbr:nberwo:18482

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  1. Engel, Charles, 2011. "The Real Exchange Rate, Real Interest Rates, and the Risk Premium," Economics Series, Institute for Advanced Studies 265, Institute for Advanced Studies.
  2. Bekaert, Geert & Wei, Min & Xing, Yuhang, 2007. "Uncovered interest rate parity and the term structure," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(6), pages 1038-1069, October.
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  8. Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  12. Menzie D. Chinn & Guy Meredith, 2005. "Testing Uncovered Interest Parity at Short and Long Horizons during the Post-Bretton Woods Era," NBER Working Papers 11077, National Bureau of Economic Research, Inc.
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  15. Popper, Helen, 1993. "Long-term covered interest parity: evidence from currency swaps," Journal of International Money and Finance, Elsevier, Elsevier, vol. 12(4), pages 439-448, August.
  16. Frankel, Jeffrey & Poonawala, Jumana, 2010. "The forward market in emerging currencies: Less biased than in major currencies," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(3), pages 585-598, April.
  17. Dooley, Michael P & Isard, Peter, 1980. "Capital Controls, Political Risk, and Deviations from Interest-Rate Parity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(2), pages 370-84, April.
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  19. Cochrane, John H, 1991. " Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations," Journal of Finance, American Finance Association, American Finance Association, vol. 46(1), pages 209-37, March.
  20. Baillie, Richard T. & Bollerslev, Tim, 1990. "A multivariate generalized ARCH approach to modeling risk premia in forward foreign exchange rate markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 9(3), pages 309-324, September.
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  22. Menzie D. Chinn & Guy Meredith, 2004. "Monetary Policy and Long-Horizon Uncovered Interest Parity," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 409-430, November.
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Cited by:
  1. Balvers, Ronald J. & Klein, Alina F., 2014. "Currency risk premia and uncovered interest parity in the International CAPM," Journal of International Money and Finance, Elsevier, Elsevier, vol. 41(C), pages 214-230.
  2. Melecky, Ales & Melecky, Martin, 2014. "The Checks of Czechs: Optimizing the Debt Portfolio of the Czech Government," MPRA Paper 57604, University Library of Munich, Germany.

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