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Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise

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  • Nelson Mark
  • Yangru Wu

Abstract

The authors examine the ability of the standard intertemporal asset pricing model and a model of noise trading to explain why the forward foreign exchange premium predicts the future currency depreciation with the 'wrong' sign. They find that the intertemporal asset pricing model is unable to predict risk premia with the correct sign to be consistent with the data. The noise-trader model, while highly stylized, receives fragmentary support from empirical research on survey expectations.
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  • Nelson Mark & Yangru Wu, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Working Papers 98-05, Ohio State University, Department of Economics.
    • Handle: RePEc:osu:osuewp:98-05
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    File URL: http://economics.sbs.ohio-state.edu/pdf/mark/noise.pdf
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