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Estimating the precise form of uncovered interest parity under the Stock–Watson dynamic OLS approach

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  • Wu, Yimin

Abstract

The standard uncovered interest parity (UIP) – a logarithm version – is inappropriate for currencies with a high-interest rate because the high-interest rate (i) does not satisfy the ln(1+i)=i condition. Therefore, we develop a precise form of UIP and evaluate its existence using BRICS countries as an example. The Stock–Watson dynamic ordinary least squares (DOLS) approach based on a panel cointegration test provides individual and group estimation, finding that UIP holds for all BRICS members except for China. This implies that the financial markets of other four economies are fully integrated with the United States financial market.

Suggested Citation

  • Wu, Yimin, 2024. "Estimating the precise form of uncovered interest parity under the Stock–Watson dynamic OLS approach," Finance Research Letters, Elsevier, vol. 67(PB).
    • Handle: RePEc:eee:finlet:v:67:y:2024:i:pb:s154461232400953x
    DOI: 10.1016/j.frl.2024.105923
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    More about this item

    Keywords

    Uncovered interest parity; Dynamic ordinary least square; Panel cointegration; BRICS;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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