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Uncovered Interest Parity: Cross‐Sectional Evidence

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  • Byung‐Joo Lee

Abstract

This paper proposes a different empirical approach to estimate the UIP by analyzing a large number of cross-country bilateral exchange rates using cross-section analysis. Different from conventional time-series UIP, cross-sectional UIP is examined with single equation estimation and panel regression model estimation. The exchange rates analyzed here include a broad spectrum of countries: developed, developing, low inflation and high inflation countries. Based on the empirical evidence, there does not appear to be a well-publicized UIP puzzle for cross-sectional UIP, and the slope estimates remain largely between zero and one throughout the sample periods, with a few exceptions. Evidence of UIP is more clear for low inflation countries than for high inflation countries. As interest rate maturity becomes longer, UIP relationship becomes weaker.
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Suggested Citation

  • Byung‐Joo Lee, 2011. "Uncovered Interest Parity: Cross‐Sectional Evidence," Review of International Economics, Wiley Blackwell, vol. 19(2), pages 219-231, May.
    • Handle: RePEc:bla:reviec:v:19:y:2011:i:2:p:219-231
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    Cited by:

    1. Nelson R. Ramírez-Rondán & Marco E. Terrones, 2024. "Uncertainty and the uncovered interest parity condition: How are they related?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(4), pages 1505-1542, November.
    2. Lee, Byung-Joo, 2013. "Uncovered interest parity puzzle: Asymmetric responses," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 238-249.
    3. 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.
    4. Shehadeh, Ali A. & Li, Youwei & Vigne, Samuel A. & Almaharmeh, Mohammad I. & Wang, Yizhi, 2021. "The existence and severity of the forward premium puzzle during tranquil and turbulent periods: Developed versus developing country currencies," International Review of Financial Analysis, Elsevier, vol. 78(C).
    5. Brian Lucey & Grace Loring, 2012. "Forward Exchange Rate Biasedness across Developed and Developing Country Currencies - Do Observed Patterns Persist Out of Sample?Abstract:," The Institute for International Integration Studies Discussion Paper Series iiisdp404, IIIS.
    6. Kumar, Vikram, 2020. "Liquidity shocks: A new solution to the forward premium puzzle," Economic Modelling, Elsevier, vol. 91(C), pages 445-454.
    7. Keppel, Catherine & Prettner, Klaus, 2015. "How interdependent are Eastern European economies and the Euro area?," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 18-31.

    More about this item

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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