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Testing uncovered interest parity at short and long horizons

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  • Chinn, Menzie D.
  • Meredith, Guy

Abstract

The unbiasedness hypothesis - the joint hypothesis of uncovered interest parity (UIP) and rational expectations - has been almost universally rejected in studies of exchange rate movements. In contrast to previous studies, which have used short-horizon data, we test this hypothesis using interest rates on longer-maturity bonds for the G-7 countries. The results of these long-horizon regressions are much more positive - the coefficients on interest differentials are of the correct sign, and almost all are closer to the predicted value of unity than to zero. These results are robust to changes in data type and to base currency (i.e., Deutschemark versus US dollar). We appeal to an econometric interpretation of the results, which focuses on the presence of simultaneity in a cointegration framework. -- Die Unverzerrtheitshypothese, die von gleichzeitiger ungedeckter Zinsparität und rationalen Erwartungen ausgeht, ist in empirischen Analysen von Wechselkursbewegungen nahezu einhellig verworfen worden. Im Gegensatz zu früheren Untersuchungen, denen Daten mit kurzfristigem Zeithorizont zugrundeliegen, wird die Hypothese in dem vorliegenden Papier mit langfristigen Anleihezinsen für die G-7-Länder getestet. Die Ergebnisse dieser Regressionen sind weitaus positiver. Die Koeffizienten für die Zinsdifferenzen weisen korrekte Vorzeichen auf und sind nahezu durchgehend näher bei dem vorhergesagten Wert von eins als bei Null angesiedelt. Die Ergebnisse erweisen sich als robust gegenüber Veränderungen in den Datensätzen und der Basiswährung (D-Mark oder US-Dollar). Die Autoren neigen zu einer ökonometrischen Interpretation der Ergebnisse, die das Vorhandensein von Simultanität unter Kointegration betont.

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Bibliographic Info

Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 102.

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Date of creation: 2000
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Handle: RePEc:zbw:hwwadp:26355

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Keywords: International Investment; Long-Term Capital Movements; Foreign Exchange; Open Economy Macroeconomics;

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References

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  1. Eric Zivot, 1998. "Cointegration and Forward and Spot Exchange Rate Regressions," Econometrics 9812001, EconWPA.
  2. Ronald Macdonald & Mark P. Taylor, 1992. "Exchange Rate Economics: A Survey," IMF Staff Papers, Palgrave Macmillan, vol. 39(1), pages 1-57, March.
  3. Alexius, Annika, 2001. "Uncovered Interest Parity Revisited," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 505-17, August.
  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  5. Kevin Clinton, 1998. "Canada-U.S. long-term interest differentials in the 1990s," Bank of Canada Review, Bank of Canada, vol. 1998(Spring), pages 17-38.
  6. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March.
  7. Chinn, Menzie & Frankel, Jeffrey, 1994. "Patterns in Exchange Rate Forecasts for Twenty-five Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 759-70, November.
  8. Popper, Helen, 1993. "Long-term covered interest parity: evidence from currency swaps," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 439-448, August.
  9. Moore, Michael J, 1994. "Testing for Unbiasedness in Forward Markets," The Manchester School of Economic & Social Studies, University of Manchester, vol. 62(0), pages 67-78, Suppl..
  10. Eric Zivot, 1998. "Cointegration and Forward and Spot Exchange Rate Regressions," Discussion Papers in Economics at the University of Washington 0069, Department of Economics at the University of Washington.
  11. Horvath, Michael T.K. & Watson, Mark W., 1995. "Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified," Econometric Theory, Cambridge University Press, vol. 11(05), pages 984-1014, October.
  12. 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.
  13. Evans, Martin D D & Lewis, Karen K, 1995. "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 709-42.
  14. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
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  16. Jacob Boudouk & Matthew Richardson, 1994. "The Statistics Of Long-Horizon Regressions Revisited," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 103-119.
  17. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
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  20. Eric Zivot, 1998. "Cointegration and Forward and Spot Exchange Rate Regressions," Working Papers 0069, University of Washington, Department of Economics.
  21. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Felmingham, Bruce & Leong, SuSan, 2005. "Parity conditions and the efficiency of the Australian 90- and 180-day forward markets," Review of Financial Economics, Elsevier, vol. 14(2), pages 127-145.
  2. Jaimilton Carvalho & José Angelo Divino, 2008. "Paridade Descoberta da Taxa de Juros em Países Latino-Americanos," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807172349250, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  3. Abdul RASHID, 2009. "Testing The Modified-Combined Ppp And Uip Hypothesis In South Asian Economies," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
  4. Rashid, Abdul & Husain, Fazal, 2012. "On the modeling of exchange rate: some evidence from Pakistan," MPRA Paper 47547, University Library of Munich, Germany.
  5. Zsolt Darvas & G�bor Rappai & Zolt�n Schepp, 2006. "Uncovering Yield Parity: A new insight into the UIP puzzle through the stationarity of long maturity forward rates," DNB Working Papers 098, Netherlands Central Bank, Research Department.
  6. Andrea Brasili & Bruno Sitzia, 2003. "Risk Related Non Linearities in Exchange Rates: Evidence from a Panel of Central and Eastern European Countries," Open Economies Review, Springer, vol. 14(2), pages 135-155, April.
  7. repec:eid:wpaper:02/11 is not listed on IDEAS
  8. Flood, Robert P & Rose, Andrew K, 2001. "Uncovered Interest Parity in Crisis: The Interest Rate Defence in the 1990s," CEPR Discussion Papers 2943, C.E.P.R. Discussion Papers.
  9. Li, Dandan & Ghoshray, A. & Morley, B., 2011. "Uncovered Interest Parity and the Risk Premium," Department of Economics Working Papers 24072, University of Bath, Department of Economics.

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