scholarly journals Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle

2012 ◽  
Vol 4 (3) ◽  
pp. 33-65 ◽  
Author(s):  
Cosmin Ilut
Keyword(s):  
Interest Rate ◽  
Ambiguity Aversion ◽  
Uncovered Interest Parity ◽  
Interest Rate Parity ◽  
Worst Case ◽  
High Interest Rate ◽  
Uncovered Interest Rate Parity ◽  
Ex Post ◽  
Dynamic Filtering ◽  
Filtering Problem

High interest rate currencies tend to appreciate in the future relative to low interest rate currencies instead of depreciating as uncovered interest parity (UIP) predicts. I construct a model of exchange rate determination in which ambiguity-averse agents face a dynamic filtering problem featuring signals of uncertain precision. Solving a max-min problem, agents act upon a worst-case signal precision and systematically underestimate the hidden state that controls payoffs. Thus, on average, agents next periods perceive positive innovations, which generates an upward re-evaluation of the strategy's profitability and implies ex post departures from UIP. The model also produces predictable expectational errors, negative skewness, and time-series momentum for currency speculation payoffs. (JEL D81, F31, G15)

scholarly journals An Ex-Post Investigation Of Interest Rate Parity In Asian Emerging Markets

2011 ◽  
Vol 6 (2) ◽  
Author(s):  
Bahram Adrangi ◽  
Kambiz Raffiee ◽  
Todd M. Shank
Keyword(s):  
Interest Rate ◽  
Emerging Markets ◽  
Statistical Tests ◽  
Supply And Demand ◽  
The Philippines ◽  
Uncovered Interest Parity ◽  
Interest Rate Parity ◽  
Ex Post ◽  
Interest Parity ◽  
Asian Emerging Markets

This paper investigates the uncovered interest parity theory for the three emerging markets of Korea, the Philippines, and Thailand. The study provides evidence on the efficiency of the currency markets of these economies. In this paper we test for the uncovered interest parity because futures markets for currencies of most emerging markets are not well developed. Furthermore, short- term exchange rate supply and demand are often dominated by the uncovered international investments. Several statistical tests are applied in an attempt to detect evidence of uncovered interest parity. We find there is evidence that the currencies of higher interest rate emerging economies tend to depreciate in the future spot market. However, our test results indicate that this relationship does not support the uncovered interest parity strictly. Arbitrage opportunities remain for a longer periods than predicted by the uncovered interest parity. Furthermore, these abnormal gains are not random and could be predicted by a well designed econometric model. These findings are consistent with empirical findings surrounding uncovered interest parity for mature markets of the world.

Uncovered Interest Rate Parity, Carry Trade, and Country Equity Return Differentials

2018 ◽  
Vol 18 (3) ◽  
pp. 20180041
Author(s):  
Termkiat Kanchanapoom ◽  
Chaiyuth Padungsaksawasdi ◽  
Pornchai Chunhachinda ◽  
Maria E. de Boyrie
Keyword(s):  
Interest Rate ◽  
Equity Returns ◽  
Uncovered Interest Parity ◽  
Currency Markets ◽  
Market Returns ◽  
Interest Rate Parity ◽  
Mixed Effect ◽  
High Interest Rate ◽  
Effect Model ◽  
International Equity

This paper applies a mixed effect model to investigate the relationship between international equity returns and forward discount sorted currency returns from three base currencies (i. e., US dollar, euro, and pound sterling). Empirical results using the portfolio approach show that high-interest rate currencies co-move positively while low-interest rate currencies co-move negatively, suggesting that foreign equity excess returns can help to explain investment in currency markets, providing a partial resolution to the uncovered interest parity conundrum. Furthermore, we show that global equity market returns, volatility, and liquidity correlate well with currency returns.

scholarly journals The Uncovered Interest Rate Parity Anomaly And Foreign Exchange Market Turnover

2012 ◽  
Vol 11 (3) ◽  
pp. 299 ◽  
Author(s):  
John F. Boschen ◽  
Kimberly J. Smith
Keyword(s):  
Interest Rate ◽  
Foreign Exchange ◽  
Foreign Exchange Market ◽  
Foreign Exchange Markets ◽  
Exchange Market ◽  
Interest Rate Parity ◽  
High Interest Rate ◽  
Uncovered Interest Rate Parity ◽  
Exchange Markets ◽  
Rate Parity

The uncovered interest rate parity (UIP) anomaly is that high interest rate currencies appreciate, rather than depreciate, against low interest rate currencies. We show that the UIP anomalies apparent in six major currency pairs have diminished over our 1995-2010 sample period. We further show that the observed decline in deviations from UIP is associated with the substantially higher transaction volume now present in the foreign exchange markets. We interpret our findings as consistent with the proposition that the UIP anomaly dissipates as the foreign exchange markets become more efficient.

Uncovered Interest Rate Parity: The Turkish Evidence

2018 ◽  
Vol 14 (2) ◽  
Author(s):  
Pelin Öge Güney
Keyword(s):  
Interest Rate ◽  
Monetary Economics ◽  
Uncovered Interest Parity ◽  
Interest Rate Parity ◽  
Capital Movements ◽  
Uncovered Interest Rate Parity ◽  
Interest Parity ◽  
Us Dollar ◽  
The Interest Rate ◽  
Turkish Lira

Abstract This paper presents an empirical investigation of the uncovered interest parity (UIP) between the Turkish Lira (TRY)/US Dollar (USD) and Turkish Lira/Euro (EUR). Our results do not provide evidence supporting the UIP hypothesis for either case. Moreover, the estimates imply causality from the TRY/USD exchange rate return to the interest rate differential. Accordingly, the Turkish Central Bank (CBRT) may respond by increasing the domestic interest rate to a depreciation of the TRY against the USD . By taking this type of action, it can be concluded that the CBRT tried to control capital movements. This result supports (McCallum, Bennett T. 1994. “A Reconsideration of the Uncovered Interest Parity Relationship.” Journal of Monetary Economics 33 (1): 105–132.)’s argument, which advances the behavior of the monetary policy as a reason for the failure of the UIP condition.

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