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Uncovered Interest Rate Parity On The Japanese Yen Exchange Rate Market

Author

Listed:
  • Katarzyna Czech

    (Warsaw University of Life Sciences - SGGW)

Abstract

The aim of the paper is to verify the uncovered interest rate parity hypothesis on the Japanese yen exchange rate market. The article describes the theory of uncovered interest rate parity and presents the review of previous research results. Moreover, the paper characterizes the currency speculation strategy „carry trade” which is fundamentally based on the assumption that the uncovered interest rate parity doesn’t hold. The Japanese yen is one of the most popular „carry trade” funding currency and therefore the article is focused on the analysis of this exchange rate market.The uncovered interest rate parity condition suggests that „carry trade” strategy should not result in excess profits. However, the high average payoff to „carry trade” is widely documented by many researchers and thus it may imply that uncovered interest rate parity doesn’t hold on the Japanese yen market. The uncovered interest rate parity on the Japanese yen market is tested by applying the conventional regression approach and orthogonality test of the forward rate forecast error. The results show that it is hard to say definitely that uncovered interest rate parity holds on the analyzed exchange rate market. The uncovered interest rate parity hypothesis is rejected for JPY/TRY market. However, there is not enough evidence to reject UIP hypothesis for JPY/NZD and JPY/USD exchange rate markets.

Suggested Citation

  • Katarzyna Czech, 2012. "Uncovered Interest Rate Parity On The Japanese Yen Exchange Rate Market," Oeconomia Copernicana, Institute of Economic Research, vol. 3(3), pages 63-77, September.
    • Handle: RePEc:pes:ieroec:v:3:y:2012:i:3:p:63-77
    DOI: 10.12775/OeC.2012.015
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    Keywords

    uncovered interest rate parity; exchange rate market; Japanese yen; currency speculation strategy „carry trade”;
    All these keywords.

    JEL classification:

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

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