Uncovered interest parity tests and exchange rate expectations
AbstractWe 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.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 54.
Date of creation: 11 Aug 2004
Date of revision:
exchange rate expectations; uncovered interest parity; market microstructure;
Other versions of this item:
- Marey,Philip S., 2004. "Uncovered interest parity tests and exchange rate expectations," Research Memoranda 021, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
- F31 - International Economics - - International Finance - - - Foreign Exchange
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- Ali, Syed Zahid & Anwar, Sajid, 2011. "Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation," Economic Modelling, Elsevier, vol. 28(4), pages 1650-1672, July.
- Erdemlioglu, Deniz M, 2007. "A new Test of Uncovered Interest Rate Parity: Evidence from Turkey," MPRA Paper 10787, University Library of Munich, Germany.
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