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The Uncovered Interest Parity in the Foreign Exchange (FX) Markets

Author

Listed:
  • Joe Akira Yoshino

    (FEA, Departamento de Economia, Universidade de São Paulo)

  • Silvio Ricardo Micheloto

    (FEA-IME-USP)

Abstract

This work verifies the uncovered interest rates parity (UIP) in the FX (foreign exchange) emerging markets by using the panel cointegration technique. The data involves several developing countries that compose the EMBI+ Global Index. We compare the results of several panel estimators: OLS (ordinary list square), DOLS (dynamic OLS) and FMOLS (fully modified OLS). This new panel technique can handle problems of either non-stationary series (spurious regression) or small problem. This latter problem has being considered one of the main causes for distorting the UIP empirical results. By using this approach, we check the UIP in the FX (foreign exchange) emerging markets. These markets are more critical because they have been subjected to changing FX regimes and speculative attacks. Our results do not corroborate the uncovered interest parity for the developing countries in the recent years. Thus, the forward premium puzzle may hold in the FX emergent markets.

Suggested Citation

  • Joe Akira Yoshino & Silvio Ricardo Micheloto, 2004. "The Uncovered Interest Parity in the Foreign Exchange (FX) Markets," Brazilian Review of Finance, Brazilian Society of Finance, vol. 2(2), pages 137-157.
    • Handle: RePEc:brf:journl:v:2:y:2004:i:2:p:137-157
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    More about this item

    Keywords

    uncovered interest rate parity; purchasing power parity; non-arbitrage; forward premium puzzle; Lucas asset pricing;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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