A new test for market efficiency and uncovered interest parity

Richard T. Baillie, Francis X. Diebold, George Kapetanios, Kun Ho Kim

Research output: Contribution to journalArticlepeer-review

Abstract

We suggest a new single-equation test for Uncovered Interest Parity () based on a dynamic regression approach. The method provides consistent and asymptotically efficient parameter estimates, and is not dependent on assumptions of strict exogeneity. This new approach is asymptotically more efficient than the common approach of using OLS with HAC robust standard errors in the static forward premium regression. The coefficient estimates when spot return changes are regressed on the forward premium are all positive and remarkably stable across currencies. These estimates are considerably larger than those of previous studies, which frequently find negative coefficients. The method also has the advantage of showing dynamic effects of risk premia, or other events that may lead to rejection of UIP or the efficient markets hypothesis.

Original languageEnglish
Article number102765
JournalJOURNAL OF INTERNATIONAL MONEY AND FINANCE
Volume130
Early online date23 Nov 2022
DOIs
Publication statusPublished - Feb 2023

Keywords

  • Dynamic regressions
  • Forward premium anomaly
  • Robust standard errors
  • Uncovered interest parity

Fingerprint

Dive into the research topics of 'A new test for market efficiency and uncovered interest parity'. Together they form a unique fingerprint.

Cite this