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Uncovered interest parity tests and exchange rate expectations

Author

Listed:
  • Philip Marey

Abstract

We show that in a representative agent model with a constant risk premium, the uncovered interest parity (UIP) test coefficient can be expressed as a function of the variables and parameters of the prevailing exchange rate expectations mechanism. Taking into account the market microstructure, the robustness of this relationship is confirmed by simulations with a multi-agent model containing a time-varying risk premium. Distributed lag expectations are able to explain the often large negative values for UIP-test-coefficients usually found in empirical studies, while bandwagon expectations are able to explain more recent findings of UIP-test-coefficients larger than one. Regressive expectations generate positive values, both smaller and larger than one. Adaptive expectations are able to generate the whole spectrum of empirical values.

Suggested Citation

  • Philip Marey, 2004. "Uncovered interest parity tests and exchange rate expectations," Computing in Economics and Finance 2004 54, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:54
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    Citations

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    Cited by:

    1. Ali, Syed Zahid & Anwar, Sajid, 2018. "Anticipated versus unanticipated terms of trade shocks and the J-curve phenomenon," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 1-19.
    2. C. Emre Alper & Oya Pinar Ardic & Salih Fendoglu, 2009. "The Economics Of The Uncovered Interest Parity Condition For Emerging Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 115-138, February.
    3. Erdemlioglu, Deniz M, 2007. "A new Test of Uncovered Interest Rate Parity: Evidence from Turkey," MPRA Paper 10787, University Library of Munich, Germany.
    4. repec:spt:apfiba:v::y:2018:i::f:8_2_5 is not listed on IDEAS
    5. Ali, Syed Zahid & Anwar, Sajid, 2011. "Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation," Economic Modelling, Elsevier, vol. 28(4), pages 1650-1672, July.

    More about this item

    Keywords

    exchange rate expectations; uncovered interest parity; market microstructure;
    All these keywords.

    JEL classification:

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

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