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Uncovered Interest Rate Parity Redux: Non- Uniform Effects

Author

Listed:
  • Yin-Wong Cheung

    (City University of Hong Kong)

  • Wenhao Wang

    (City University of Hong Kong)

Abstract

An empirical model that includes proxies for unobservable factors and allows for non-uniform effects due to model uncertainty and time-varying parameters can reduce the deviation of uncovered interest rate parity (UIP) as measured by the β-estimate that captures the interest rate differential effect in UIP regressions. However, the specification that alleviated UIP failure does not reduce the variability of the β-estimate, exhibits composition changes and time-varying parameters, and varies across exchange rates. These findings collaborate the scapegoat theory, and suggest that shifting roles of explanatory variables and time-varying effects contribute to the difficulty of rectifying the empirical UIP failure.

Suggested Citation

  • Yin-Wong Cheung & Wenhao Wang, 2020. "Uncovered Interest Rate Parity Redux: Non- Uniform Effects," GRU Working Paper Series GRU_2020_004, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2020_004
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    File URL: https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232020-004%20Cheung.pdf
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    Cited by:

    1. is not listed on IDEAS
    2. Michał Rubaszek & Joscha Beckmann & Michele Ca’ Zorzi & Marek Kwas, 2025. "Boosting Carry with Equilibrium Exchange Rate Estimates," Open Economies Review, Springer, vol. 36(4), pages 1281-1307, September.
    3. Yin-Wong Cheung & Wenhao Wang & Frank Westermann, 2025. "An In-Sample Evaluation of Exchange Rate Models: In Search of Scapegoats," IEER Working Papers 125, Institute of Empirical Economic Research, Osnabrueck University.
    4. Helder Ferreira de Mendonça & Luciano Vereda & Luan Mateus Matos de Araújo, 2025. "Fundamentals Models Versus Random Walk: Evidence From an Emerging Economy," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 44(6), pages 1884-1906, September.

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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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