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Uncovered interest parity tests and exchange rate expectations

Author

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  • Philip Marey

Abstract

We show that in a representative agent model with a constant risk premium, the uncovered interest parity (UIP) test coefficient can be expressed as a function of the variables and parameters of the prevailing exchange rate expectations mechanism. Taking into account the market microstructure, the robustness of this relationship is confirmed by simulations with a multi-agent model containing a time-varying risk premium. Distributed lag expectations are able to explain the often large negative values for UIP-test-coefficients usually found in empirical studies, while bandwagon expectations are able to explain more recent findings of UIP-test-coefficients larger than one. Regressive expectations generate positive values, both smaller and larger than one. Adaptive expectations are able to generate the whole spectrum of empirical values.

Suggested Citation

  • Philip Marey, 2004. "Uncovered interest parity tests and exchange rate expectations," Computing in Economics and Finance 2004 54, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:54
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    Cited by:

    1. repec:eee:jimfin:v:81:y:2018:i:c:p:1-19 is not listed on IDEAS
    2. Erdemlioglu, Deniz M, 2007. "A new Test of Uncovered Interest Rate Parity: Evidence from Turkey," MPRA Paper 10787, University Library of Munich, Germany.
    3. repec:spt:apfiba:v::y:2018:i::f:8_2_5 is not listed on IDEAS
    4. repec:spt:apfiba:v:8:y:2018:i:2:f:8_2_5 is not listed on IDEAS

    More about this item

    Keywords

    exchange rate expectations; uncovered interest parity; market microstructure;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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