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Uncovered Interest Parity at Long Horizons: Evidence on Emerging Economies

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  • Arnaud Mehl
  • Lorenzo Cappiello

Abstract

This paper estimates uncovered interest parity (UIP) at long horizons using bilateral US dollar rates vis‐à‐vis mature economy and emerging market currencies. The paper finds support in favor of UIP for dollar rates vis‐à‐vis major mature economy currencies, but far less against emerging market currencies. There are also signs that political risk and the exchange risk premium help explain the empirical failure of UIP for these latter currencies. This suggests that whether UIP holds depends more on the currency than on the horizon.

Suggested Citation

  • Arnaud Mehl & Lorenzo Cappiello, 2009. "Uncovered Interest Parity at Long Horizons: Evidence on Emerging Economies," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 1019-1037, November.
    • Handle: RePEc:bla:reviec:v:17:y:2009:i:5:p:1019-1037
    DOI: 10.1111/j.1467-9396.2008.00793.x
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    Cited by:

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    3. Lee, Byung-Joo, 2013. "Uncovered interest parity puzzle: Asymmetric responses," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 238-249.
    4. Shehadeh, Ali & Li, Youwei & Moore, Michael, 2016. "The Forward Premium Bias, Carry Trade Return and the Risks of Volatility and Liquidity," MPRA Paper 71709, University Library of Munich, Germany.
    5. Yao Amber Li & Carol Zhao Chen, 2015. "Forward-Looking Exporters and Exchange Rate Pass-Through: A Micro-Level Investigation," HKUST IEMS Working Paper Series 2015-28, HKUST Institute for Emerging Market Studies, revised Jul 2015.
    6. Nath, Golaka, 2013. "The Spot Forward Exchange Rate Relation in Indian Foreign Exchange Market - An Analysis," MPRA Paper 51591, University Library of Munich, Germany.
    7. 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.
    8. Yao Amber Li & Chen Carol Zhao, 2016. "Price Adjustment to Exchange Rates and Forward-looking Exporters: Evidence from USA–China Trade," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 1023-1049, November.
    9. Tang, Kin-Boon, 2011. "The precise form of uncovered interest parity: A heterogeneous panel application in ASEAN-5 countries," Economic Modelling, Elsevier, vol. 28(1-2), pages 568-573, January.
    10. Bhatta, Guna Raj & Nepal, Rabindra & Harvie, Charles & Jayanthakumaran, Kankesu, 2022. "Testing for the uncovered interest parity condition in a small open economy: A state space modelling approach," Journal of Asian Economics, Elsevier, vol. 82(C).
    11. Bhatti, Razzaque H., 2014. "The existence of uncovered interest parity in the CIS countries," Economic Modelling, Elsevier, vol. 40(C), pages 227-241.
    12. Pippenger, John, 2011. "A Complete Solution To The Forward-Bias Puzzle," University of California at Santa Barbara, Economics Working Paper Series qt5gq9z4j0, Department of Economics, UC Santa Barbara.
    13. Norman C. Miller, 2014. "Exchange Rate Economics," Books, Edward Elgar Publishing, number 14981, March.
    14. Hossfeld, Oliver & MacDonald, Ronald, 2015. "Carry funding and safe haven currencies: A threshold regression approach," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 185-202.
    15. Chen, Yu-Lun & Li, Yi-Hua & Mo, Wan-Shin & Yang, J. Jimmy, 2025. "Covered interest rate parity deviations, COVID-19 pandemic infection cases, and vaccination," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 99(C).
    16. Wagner Piazza Gaglianone & Jaqueline Terra Moura Marins & José Valentim Machado Vicente, 2025. "When Low Rates Speak Loud: exchange rate dynamics under different interest rate regimes," Working Papers Series 630, Central Bank of Brazil, Research Department.
    17. Dinçer Afat & Michael Frömmel, 2021. "A Panel Data Analysis of Uncovered Interest Parity and Time-Varying Risk Premium," Open Economies Review, Springer, vol. 32(3), pages 507-526, July.
    18. Pippenger, John, 2012. "What Covered Interest Parity Implies about the Theory of Uncovered Interest Parity," University of California at Santa Barbara, Economics Working Paper Series qt0zk6t2hj, Department of Economics, UC Santa Barbara.
    19. Tang, Kin-Boon, 2011. "The precise form of uncovered interest parity: A heterogeneous panel application in ASEAN-5 countries," Economic Modelling, Elsevier, vol. 28(1), pages 568-573.
    20. Jae Young Jang & Erdal Atukeren, 2019. "Sustainable Local Currency Debt: An Analysis of Foreigners’ Korea Treasury Bonds Investments Using a LA-VARX Model," Sustainability, MDPI, vol. 11(13), pages 1-23, June.
    21. Kumar, Satish, 2019. "Does risk premium help uncover the uncovered interest parity failure?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).
    22. Pippenger, John, 2013. "The Failure Of Uncovered Interest Parity, Forward Bias And Related Puzzles," University of California at Santa Barbara, Economics Working Paper Series qt50n5p8bv, Department of Economics, UC Santa Barbara.

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