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Uncovered Interest Parity and Financial Market Volatility

Author

Listed:
  • Alexandra Horobet

    (Bucharest Academy of Economic Studies, Romania)

  • Sorin Dumitrescu

    (Bucharest Academy of Economic Studies, Romania)

  • Dan Gabriel Dumitrescu

    (Bucharest Academy of Economic Studies, Romania)

Abstract

Our paper addresses the relationship between exchange rates changes and interest rate differentials in the UIP framework, by taking into account capital market and foreign exchange market volatility. We use eight currencies, of which five are Central and Eastern European and three are developed markets currencies, and their relationship to the US dollar. We use OLS regressions to capture the influence of volatility on UIP testing. We find that UIP is not validated, overall and in times of high volatility, but the direction in the exchange rate change indicated by the interest rate differential follows the UIP framework. The relationship between interest rate differentials and exchange rates changes is weak and taking into account market volatility does not significantly alter our results.

Suggested Citation

  • Alexandra Horobet & Sorin Dumitrescu & Dan Gabriel Dumitrescu, 2009. "Uncovered Interest Parity and Financial Market Volatility," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 12(32), pages 21-45, (2).
    • Handle: RePEc:rej:journl:v:12:y:2009:i:32:p:21-45
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    File URL: http://www.rejournal.eu/sites/rejournal.versatech.ro/files/articole/2014-04-14/2149/je203220-20horobet20dumitrescu20dumitrescu.pdf
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    References listed on IDEAS

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    1. repec:bla:reviec:v:9:y:2001:i:3:p:505-17 is not listed on IDEAS
    2. Bekaert, Geert, 1995. "The Time Variation of Expected Returns and Volatility in Foreign-Exchange Markets," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 397-408, October.
    3. Annika Alexius, 2001. "Uncovered Interest Parity Revisited," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 505-517, August.
    4. Peter Backé & Franz Schardax, 2009. "European and Non-European Emerging Market Currencies: Forward Premium Puzzle and Fundamentals," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 56-66.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. TRIANDAFIL, Cristina Maria, 2013. "Sustainability of convergence in the context of macro-prudential policies in the European Union," Working Papers of National Institute for Economic Research 130618, Institutul National de Cercetari Economice (INCE).

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    More about this item

    Keywords

    exchange rates; volatility; uncovered interest parity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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