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Testing uncovered interest parity at short and long horizons

Author

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  • Chinn, Menzie D.
  • Meredith, Guy
Abstract
The unbiasedness hypothesis - the joint hypothesis of uncovered interest parity (UIP) and rational expectations - has been almost universally rejected in studies of exchange rate movements. In contrast to previous studies, which have used short-horizon data, we test this hypothesis using interest rates on longer-maturity bonds for the G-7 countries. The results of these long-horizon regressions are much more positive - the coefficients on interest differentials are of the correct sign, and almost all are closer to the predicted value of unity than to zero. These results are robust to changes in data type and to base currency (i.e., Deutschemark versus US dollar). We appeal to an econometric interpretation of the results, which focuses on the presence of simultaneity in a cointegration framework.

Suggested Citation

  • Chinn, Menzie D. & Meredith, Guy, 2000. "Testing uncovered interest parity at short and long horizons," HWWA Discussion Papers 102, Hamburg Institute of International Economics (HWWA).
    • Handle: RePEc:zbw:hwwadp:26355
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Felmingham, Bruce & Leong, SuSan, 2005. "Parity conditions and the efficiency of the Australian 90- and 180-day forward markets," Review of Financial Economics, Elsevier, vol. 14(2), pages 127-145.
    2. Abdul RASHID, 2009. "Testing The Modified-Combined Ppp And Uip Hypothesis In South Asian Economies," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
    3. Bruce Felmingham & SuSan Leong, 2005. "Parity conditions and the efficiency of the Australian 90‐ and 180‐day forward markets," Review of Financial Economics, John Wiley & Sons, vol. 14(2), pages 127-145.
    4. Zsolt Darvas & Gábor Rappai & Zoltán Schepp, 2006. "Uncovering Yield Parity: A new insight into the UIP puzzle through the stationarity of long maturity forward rates," DNB Working Papers 098, Netherlands Central Bank, Research Department.
    5. Mr. Andrew K. Rose & Mr. Robert P Flood, 2001. "Uncovered Interest Parity in Crisis: The Interest Rate Defense in the 1990s," IMF Working Papers 2001/207, International Monetary Fund.
    6. Dandan Li & A Ghoshray & Bruce Morley, 2011. "Uncovered Interest Parity and the Risk Premium," Department of Economics Working Papers 02/11, University of Bath, Department of Economics.
    7. Andrea Brasili & Bruno Sitzia, 2003. "Risk Related Non Linearities in Exchange Rates: Evidence from a Panel of Central and Eastern European Countries," Open Economies Review, Springer, vol. 14(2), pages 135-155, April.
    8. repec:eid:wpaper:02/11 is not listed on IDEAS
    9. Rashid, Abdul & Husain, Fazal, 2012. "On the modeling of exchange rate: some evidence from Pakistan," MPRA Paper 47547, University Library of Munich, Germany.
    10. Jaimilton Carvalho & José Angelo Divino, 2008. "Paridade Descoberta da Taxa de Juros em Países Latino-Americanos," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807172349250, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

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    More about this item

    Keywords

    International Investment; Long-Term Capital Movements; Foreign Exchange; Open Economy Macroeconomics;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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