IDEAS home Printed from https://ideas.repec.org/a/wly/japmet/v40y2025i3p310-324.html
   My bibliography  Save this article

Exchange Rates, Uncovered Interest Parity, and Time‐Varying Fama Regressions

Author

Listed:
  • Bowen Fu
  • Mengheng Li
  • Qazi Haque

Abstract

This paper studies the forward premium puzzle, which signals a violation of the uncovered interest parity (UIP) hypothesis. We test this hypothesis with Fama‐style regressions with time‐varying parameters (TVPs) and stochastic volatility (SV) on six major currencies relative to the US dollar on monthly samples from 1993 to 2018. TVP‐SV regressions are also employed to examine the opposing predictions of the forward premium and excess volatility puzzles often found in exchange rate risk premiums and interest rate differentials. Using Bayesian methods, we document that the riskiness of exchange rates explains the forward premium puzzle, while a liquidity premium reconciles the contrasting predictions of the forward premium and excess volatility puzzles.

Suggested Citation

  • Bowen Fu & Mengheng Li & Qazi Haque, 2025. "Exchange Rates, Uncovered Interest Parity, and Time‐Varying Fama Regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 40(3), pages 310-324, April.
    • Handle: RePEc:wly:japmet:v:40:y:2025:i:3:p:310-324
    DOI: 10.1002/jae.3111
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/jae.3111
    Download Restriction: no
    File URL: https://libkey.io/10.1002/jae.3111?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:japmet:v:40:y:2025:i:3:p:310-324. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0883-7252/ .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.