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Testing Uncovered Interest Parity: A Continuous‐Time Approach

  • Antonio Diez de los Rios
  • Enrique Sentana

Nowadays researchers can choose the sampling frequency of exchange rates and interest rates. If the number of observations per contract period is large relative to the sample size, standard GMM asymptotic theory provides unreliable inferences in UIP regression tests. We specify a bivariate continuous-time model for exchange rates and forward premia robust to temporal aggregation, unlike the discrete time models in the literature. We obtain the UIP restrictions on the continuous-time model parameters, which we estimate efficiently, and propose a novel specification test that compares estimators at different frequencies. Our empirical results based on correctly specified models reject UIP.

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File URL: http://hdl.handle.net/10.1111/j.1468-2354.2011.00665.x
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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 52 (2011)
Issue (Month): 4 (November)
Pages: 1215-1251

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Handle: RePEc:ier:iecrev:v:52:y:2011:i:4:p:1215-1251
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