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Insured uncovered interest parity

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  • Tse, Yiuman
  • Wald, John K.

Abstract

The current literature suggests that uncovered interest parity (UIP) does not hold because of differences in risk in holding different currency denominated debt. We test whether this risk is related to sovereign credit risk in government bonds. We consider an insured uncovered interest parity relationship – that is, one where debt is insured with credit default swap (CDS) contracts. CDS rates help explain the UIP puzzle but have no predictive power for carry trade returns and currency movements.

Suggested Citation

  • Tse, Yiuman & Wald, John K., 2013. "Insured uncovered interest parity," Finance Research Letters, Elsevier, vol. 10(4), pages 175-183.
    • Handle: RePEc:eee:finlet:v:10:y:2013:i:4:p:175-183
    DOI: 10.1016/j.frl.2013.06.004
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    References listed on IDEAS

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    Cited by:

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    2. Mehmet Altuntas, 2021. "The Interest Rate Parity in Fragile Five Countries: Evidence from Unit Root Tests with Breaks," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 8(2), pages 327-349, July.
    3. Chen, Zilin & Gang, Jianhua & Qian, Zongxin, 2021. "Stock returns and carry trades," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    4. Adewuyi, Adeolu O. & Ogebe, Joseph O., 2019. "The validity of uncovered interest parity: Evidence from african members and non-member of the organisation of petroleum exporting countries (OPEC)," Economic Modelling, Elsevier, vol. 82(C), pages 229-249.

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    More about this item

    Keywords

    Uncovered interest parity; Carry trade; CDS;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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