IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Testing and Interpreting Uncovered Interest Parity in Russia

Listed author(s):
  • Vasilyev, Dmitry

    (National Research University Higher School of Economics)

  • Busygin, Vladimir

    (National Research University Higher School of Economics)

  • Busygin, Sergei

    (Novosibirsk State University)

Registered author(s):

    The failure of uncovered interest rate parity (UIP) is a well-known phenomenon in last thirty years. The failure of UIP is more prominent in advanced economies rather than in emerging market economies. Usually UIP estimation for an advanced economy gives negative coefficient, meaning that higher interest rate in the advanced economy A will result in the appreciation of the economy A’s exchange rate. In case of emerging market economies, higher interest rate usually corresponds to future depreciation, although this depreciation is not sufficient for UIP to hold. This paper shows that UIP holds in Russia even better than on average in other emerging market economies, if the UIP equation includes constant risk premium. Consequently, there is no forward premium puzzle in Russian data of 2001–2014. To show the results on Russia and compare them with the results on other countries, we estimate UIP, first, for Russia, and then for the advanced and emerging market economies, using seemingly unrelated regresions and panel data analysis. By comparing profitability of static and dynamic carry trade strategies, we also confirm that in the emerging market economies risk premium is often constant, whereas in the advanced economies risk premium is almost always volatile. This feature may explain why UIP holds better for emerging market economies. It also enables us to formulate the hypothesis saying that macroeconomic policy of the emerging market economies, such as the accumulation of large foreign exchange reserves, stabilize risk premium

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: ftp://w82.ranepa.ru/rnp/ecopol/ep1642.pdf
    Download Restriction: no

    Article provided by Russian Presidential Academy of National Economy and Public Administration in its journal Economic Policy.

    Volume (Year): 4 (2016)
    Issue (Month): (August)
    Pages: 35-55

    as
    in new window

    Handle: RePEc:rnp:ecopol:ep1642
    Contact details of provider: Postal:
    82, Vernadsky pr., 117571, Moscow

    Phone: +7 (499) 956 95 86
    Fax: (095) 564-85-80
    Web page: http://www.rane.ru/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Frankel, Jeffrey & Poonawala, Jumana, 2010. "The forward market in emerging currencies: Less biased than in major currencies," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 585-598, April.
    2. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    3. Brandt, Michael W. & Cochrane, John H. & Santa-Clara, Pedro, 2006. "International risk sharing is better than you think, or exchange rates are too smooth," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 671-698, May.
    4. Martin D. D. Evans, 2011. "Exchange-Rate Dynamics," Economics Books, Princeton University Press, edition 1, number 9475.
    5. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
    6. Bansal, Ravi & Dahlquist, Magnus, 2000. "The forward premium puzzle: different tales from developed and emerging economies," Journal of International Economics, Elsevier, vol. 51(1), pages 115-144, June.
    7. Craig Burnside, 2015. "The Carry Trade in Industrialized and Emerging Markets," Central Banking, Analysis, and Economic Policies Book Series,in: Claudio Raddatz & Diego Saravia & Jaume Ventura (ed.), Global Liquidity, Spillovers to Emerging Markets and Policy Responses, edition 1, volume 20, chapter 8, pages 245-280 Central Bank of Chile.
    8. Menzie D. Chinn & Saad Quayyum, 2012. "Long Horizon Uncovered Interest Parity Re-Assessed," NBER Working Papers 18482, National Bureau of Economic Research, Inc.
    9. Menzie D. Chinn & Guy Meredith, 2004. "Monetary Policy and Long-Horizon Uncovered Interest Parity," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 409-430, November.
    10. Clarida, Richard & Davis, Josh & Pedersen, Niels, 2009. "Currency carry trade regimes: Beyond the Fama regression," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1375-1389, December.
    11. David K. Backus, 2001. "Affine Term Structure Models and the Forward Premium Anomaly," Journal of Finance, American Finance Association, vol. 56(1), pages 279-304, February.
    12. Pasquale Della Corte & Steven J. Riddiough & Lucio Sarno, 2016. "Currency Premia and Global Imbalances," Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2161-2193.
    13. Gabriele Galati & Alexandra Heath & Patrick McGuire, 2007. "Evidence of carry trade activity," BIS Quarterly Review, Bank for International Settlements, September.
    14. Bilson, John F O, 1981. "The "Speculative Efficiency" Hypothesis," The Journal of Business, University of Chicago Press, vol. 54(3), pages 435-451, July.
    15. Laura Alfaro & Fabio Kanczuk, 2013. "Debt Redemption and Reserve Accumulation," NBER Working Papers 19098, National Bureau of Economic Research, Inc.
    16. Chinn, Menzie D., 2006. "The (partial) rehabilitation of interest rate parity in the floating rate era: Longer horizons, alternative expectations, and emerging markets," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 7-21, February.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:rnp:ecopol:ep1642. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RANEPA maintainer)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.