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UIP deviations in times of uncertainty: not all countries behave alike

Author

Listed:
  • Purva Gole

    (EHESS, Paris)

  • Erica Perego

    (CEPII, Paris)

  • Camelia Turcu

    (LEO, University of Orl´eans)

Abstract

In this paper, we reconsider the role of uncertainty in explaining uncovered interest rate parity (UIP) deviations by focusing on 60 emerging and developing (EMDE) and advanced (AE) economies, over the period 1995M1–2023M3. We show that differentiating between EMDE currencies and AE currencies is crucial for understanding UIP deviations as the behaviour of excess returns differs in the two groups in periods of uncertainty: deviations become wider for EMDEs and narrow for AEs. These new results are consistent with the idea that in periods of uncertainty, global investors might change their risk preferences and move from high currency-risk investments in EMDEs towards less risky ones in AEs. This evidence holds for both the short-run and long-run UIP, and becomes stronger since the Global Financial Crisis (GFC).

Suggested Citation

  • Purva Gole & Erica Perego & Camelia Turcu, 2024. "UIP deviations in times of uncertainty: not all countries behave alike," Working Papers 2024.5, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2024.5
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Uncertainty; uncovered interest rate parity; risk premia; emerging countries;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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