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Do Exchange Rates Move in Line With Uncovered Interest Parity?

Author

Listed:
  • Huisman, R.
  • Mahieu, R.J.
  • Mulder, A.

Abstract

According to uncovered interest rate Parity (UIP), the expected relative change in an exchange rate is equal to the difference between interest rates between the two currencies. Empirically, UIP is frequently rejected. In this paper, we examine whether exchange rates have at least any tendency to move in the direction predicted by UIP and whether exchange rates tend to move more in line with UIP in periods with large interest rate differentials.

Suggested Citation

  • Huisman, R. & Mahieu, R.J. & Mulder, A., 2007. "Do Exchange Rates Move in Line With Uncovered Interest Parity?," ERIM Report Series Research in Management ERS-2007-012-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  • Handle: RePEc:ems:eureri:8993
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    File URL: https://repub.eur.nl/pub/8993/ERS-2007-012-F&A.pdf
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    References listed on IDEAS

    as
    1. Lothian, James R. & Wu, Liuren, 2011. "Uncovered interest-rate parity over the past two centuries," Journal of International Money and Finance, Elsevier, vol. 30(3), pages 448-473, April.
    2. Lucio Sarno, 2005. "Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(3), pages 673-708, August.
    3. 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.
    4. Huisman, Ronald & Koedijk, Kees & Kool, Clemens & Nissen, Francois, 1998. "Extreme support for uncovered interest parity," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 211-228, February.
    5. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    6. Bansal, Ravi, 1997. "An Exploration of the Forward Premium Puzzle in Currency Markets," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 369-403.
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    Cited by:

    1. Li, Dandan & Ghoshray, Atanu & Morley, Bruce, 2012. "Measuring the risk premium in uncovered interest parity using the component GARCH-M model," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 167-176.

    More about this item

    Keywords

    Exchange rates; Logit models; Uncovered interest rate parity;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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