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Do Professional Forecasters Follow Uncovered Interest Rate Parity?

Author

Listed:
  • Constantin Bürgi
  • Mengdi Song

Abstract

Not according to our data. We use two data sets to test whether professional forecasters follow uncovered interest rate parity (UIP) when making their exchange rate predictions both based on point prediction and direction. We find that professional forecasters generally do not follow UIP across a range of currencies and horizons. Given the prevalence of the UIP condition in our international macro models, these results reiterate the importance of finding the drivers for these deviations.

Suggested Citation

  • Constantin Bürgi & Mengdi Song, 2024. "Do Professional Forecasters Follow Uncovered Interest Rate Parity?," CESifo Working Paper Series 11338, CESifo.
    • Handle: RePEc:ces:ceswps:_11338
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    References listed on IDEAS

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    1. Stefan Avdjiev & Wenxin Du & Cathérine Koch & Hyun Song Shin, 2019. "The Dollar, Bank Leverage, and Deviations from Covered Interest Parity," American Economic Review: Insights, American Economic Association, vol. 1(2), pages 193-208, September.
    2. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-153, March.
    3. Engel, Charles & Kazakova, Katya & Wang, Mengqi & Xiang, Nan, 2022. "A reconsideration of the failure of uncovered interest parity for the U.S. dollar," Journal of International Economics, Elsevier, vol. 136(C).
    4. Pesaran, M Hashem & Timmermann, Allan, 1992. "A Simple Nonparametric Test of Predictive Performance," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 561-565, October.
    5. Baillie, Richard T. & Diebold, Francis X. & Kapetanios, George & Kim, Kun Ho, 2023. "A new test for market efficiency and uncovered interest parity," Journal of International Money and Finance, Elsevier, vol. 130(C).
    6. Anatolyev, Stanislav & Gerko, Alexander, 2005. "A Trading Approach to Testing for Predictability," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 455-461, October.
    7. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    8. Wenxin Du & Alexander Tepper & Adrien Verdelhan, 2018. "Deviations from Covered Interest Rate Parity," Journal of Finance, American Finance Association, vol. 73(3), pages 915-957, June.
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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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