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The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey

  • C. Emre Alper
  • Oya Pinar Ardic
  • Salih Fendoglu

Financial account liberalizations since the second half of the 1980s paved way for the burgeoning literature that investigates foreign exchange market efficiency in emerging markets via testing for the uncovered interest parity (UIP) condition. This paper provides a broad and critical survey on this recent literature as well as a general understanding on the topic through reviewing the related literature on developed economies where recent methodological advances in time series econometrics have provided favorable results, questioning the previously documented UIP puzzle. The literature on emerging markets suggests that these countries deserve a special treatment by taking into account the existence of additional types of risk premia, high inflation episodes, financial contagion, peso problem, simultaneity problem, asymmetricity, and the determination of de facto structural breaks.

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File URL: http://www.econ.boun.edu.tr/public_html/RePEc/pdf/200713.pdf
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Paper provided by Bogazici University, Department of Economics in its series Working Papers with number 2007/13.

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Date of creation: 2007
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Handle: RePEc:bou:wpaper:2007/13
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  1. Christophe Chamley, 2006. "Complementarities in information acquisition with short-term trades," Boston University - Department of Economics - Working Papers Series WP2006-042, Boston University - Department of Economics.
  2. Adrien Verdelhan, 2010. "A Habit-Based Explanation of the Exchange Rate Risk Premium," Journal of Finance, American Finance Association, vol. 65(1), pages 123-146, 02.
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