Alper, C. Emre and Ardic, Oya Pinar and Fendoglu, Salih (2007): The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey.
Download (263kB) | Preview
Financial account liberalizations since the second half of the 1980s paved way for the burgeoning literature that investigates foreign exchange market efficiency in emerging markets via testing for the uncovered interest parity (UIP) condition. This paper provides a broad and critical survey on this recent literature as well as a general understanding on the topic through reviewing the related literature on developed economies where recent methodological advances in time series econometrics have provided favorable results, questioning the previously documented UIP puzzle. The literature on emerging markets suggests that these countries deserve a special treatment by taking into account the existence of additional types of risk premia, high inflation episodes, financial contagion, peso problem, simultaneity problem, asymmetricity, and the determination of de facto structural breaks.
|Item Type:||MPRA Paper|
|Original Title:||The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey|
|Keywords:||Uncovered Interest Parity; Forward Premium Bias; Emerging Markets|
|Subjects:||F - International Economics > F3 - International Finance > F31 - Foreign Exchange|
|Depositing User:||Oya Pinar Ardic|
|Date Deposited:||15. Jul 2007|
|Last Modified:||09. Jan 2014 07:02|
Albuquerque, R. (2006). The Forward Premium Puzzle in a Model of Imperfect Information: Theory and Evidence. Mimeo, Boston University.
Alexius, A. (2001). Uncovered Interest Parity Revisited. Review of International Economics 9: 505-517.
Alexius, A. (2002). Can endogenous monetary policy explain the deviations from UIP? Working Paper No. 2002-17, Uppsala University, Sweden.
Aliber, R. Z. (1973). The Interest Rate Parity Theorem: A Reinterpretation. Journal of Political Economy 81(6): 1451-1459.
Alvarez, F., Atkeson, A., and Kehoe P. J. (2006). Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium. Research Department Staff Report No. 371, Federal Reserve Bank of Minneapolis.
Anker, P. (1999). Uncovered Interest Parity, Monetary Policy and Time-Varying Risk Premia. Journal of International Money and Finance 18: 835-851.
Bacchetta, P., and van Wincoop, E. (2006). Incomplete Information Processing: A Solu- tion to the Forward Discount Puzzle. Proceedings, Federal Reserve Bank of San Francisco, June.
Baharumshah, A. Z., Hawa, C. T., and Fountas, S. (2005). A panel study on real interest rate parity in East Asian countries: Pre- and post-liberalization era. Global Finance Journal 16: 69-85.
Baillie, R.T., and Bollerslev, T. P. (2000). The Forward Premium Anomaly is not as Bad as you Think. Journal of International Money and Finance 19: 471-488.
Baillie, R.T., and Kilic, R. (2006). Do asymmetric and nonlinear adjustments explain the forward premium anomaly?. Journal of International Money and Finance 25(1): 22- 47.
Baillie, R.T., and Osterberg, W. P. (2000). Deviations from daily uncovered interest rate parity and the role of intervention. Journal of International Financial Markets, Institutions and Money 10: 363-379.
Bansal, R. (1997). An Exploration of the Forward Premium Puzzle in Currency Markets. Review of Financial Studies 10: 369-403.
Bansal, R., and Dahlquist, M. (2000). The Forward Premium Puzzle: Different Tales from Developed and Emerging Economies. Journal of International Economics 51: 115- 144.
Bekaert, G., Harvey, C. R., and Lumsdaine, R. L. (2002). Dating the integration of world equity markets. Journal of Financial Economics, 65(2): 203-247.
Bekaert, G., Harvey, C. R. (2003). Emerging markets finance. Journal of Empirical Finance 10: 3-55.
Bekaert, G., Wei, M., and Xing, Y. (2007). Uncovered Interest Rate Parity and the Term Structure. Journal of International Money and Finance, forthcoming.
Bratsiotis, G. J., and Robinson, W. (2006). Currency composition of debt, risk premia and the 1997 Korean crisis. Economic Modelling 22: 459-471.
Calvo, G. A., and Reinhart, C. M. (2002). Fear of Floating. Quarterly Journal of Economics 107(2): 379-408.
Campbell, J. Y., and Cochrane, J. H. (1999). By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107(2): 205-251.
Carvalho, J.V., Sachsida, A., Loureiro, P. R. A., and Moreira, T. B. S. (2004). Uncovered Interest Parity in Argentina, Brazil, Chile, and Mexico: A Unit Root Test Application with Panel Data. Review of Urban and Regional Development Studies 16: 263-269.
Carvalho, B., and Garcia, M. (2007). Ineffective controls on capital inflows under sophisticated financial markets: Brazil in the nineties. In Edwards, S., and Garcia M. (Eds.), Financial Markets Volatility and Performance in Emerging Markets, (Inter-American Seminar on Economics), University of Chicago Press, forthcoming.
Cavoli, T., and Rajan, R. S. (2006). Capital Inflows Problem in Selected Asian Coun- tries in the 1990s Revisited: The Role of Monetary Sterilization. Asian Economic Journal 20(4): 409-423.
Chaboud, A. P., and Wright, J. H. (2005). Uncovered interest parity: it works, but not for long. Journal of International Economics 66: 349-362.
Chinn, M., and Frankel, J. (2002). Survey Data on Exchange Rate Expectations: More Currencies, More Horizons, More Tests. In Allen, W., Dickinson, D. (Eds.), Monetary Policy, Capital Flows and Financial Market Developments in the Era of Financial Globalisation: Essays in Honour of Max Fry, Routledge, London and New York, pp. 145-167.
[Chinn, M., and Meredith, G. (2004). Monetary Policy and Long Horizon Uncovered Interest Parity. IMF Staff Papers 51(3): 409-430.
Chinn, M., and Meredith, G. (2005). Testing Uncovered Interest Parity at Short and Long Horizons During the post-Bretton Woods Era. NBER Working Paper No. 11077.
Chinn, M. (2006). The (partial) rehabilitation of interest rate parity in the floating rate era: Longer horizons, alternative expectations, and emerging markets. Journal of International Money and Finance 25: 7-21.
Christensen, M. (2000). Uncovered Interest Parity and Policy Behavior: New Evidence. Economics Letters 69: 81-87.
Choi, K., and Zivot, E. (2007). Long memory and structural changes in the forward discount: An empirical investigation. Journal of International Money and Finance 26(3): 342-363.
Clarida, R. H., and Taylor, M. P. (1997). The Term Structure of Forward Exchange Premiums and the Forecastability of Spot Exchange Rates: Correcting the Errors. The Review of Economics and Statistics 79(3): 353-361.
Clarida, R. H., Sarno. L., Taylor, M. P., and Valente, G. (2003). The out-of-sample success of term structure models as exchange rate predictors: a step beyond. Journal of International Economics 60: 61-83.
Domowitz, I., Glen, J., and Madhavan, A. (1998). Country and Currency Risk Premia in an Emerging Market, The Journal of Financial and Quantitative Analysis 33(2): 189- 216.
Dooley, M. P., and Isard, P. (1980). Capital Controls, Political Risks, and Deviations from Interest-Rate Parity. Journal of Political Economy 88(2): 370-384.
Dornbusch, R. (1983). Exchange rate and the macroeconomics of exchange rate determination. In Hawkins, R., Levich, R.M., Whilborg, C. (Eds.), Research in International Business and Finance 3, London-England: JAI Press, pp.3-27.
Dumas, B. (1992). Dynamic Equilibrium and the Real Exchange Rate in Spatially Seperated World. Review of Financial Studies 5: 153-180.
Edlin, A. S. (2002). Forward Discount Bias, Nalebuff's Envelope Puzzle, and the Siegel Paradox in Foreign Exchange. Topics in Theoretical Economics 2(1), Article No. 3.
Edwards, S. (2007). Financial Openness, Currency Crises and Output Losses. In Edwards, S., and Garcia M. (Eds.), Financial Markets Volatility and Performance in Emerging Markets, (Inter-American Seminar on Economics), University of Chicago Press, forthcoming.
Eichenbaum, M., and Evans, C. L. (1995). Some empirical evidence on the effects of shocks to monetary policy on exchange rates. Quarterly Journal of Economics 110(4): 975-1009.
Engel, C. (1996). The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence. Journal of Empirical Finance 3: 123-192.
Fama, E., MacBeth, J.D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of Political Economy 71: 607-636.
Fama, E., and French, K. (1993). Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics 53: 427-465.
Fama, E., and French, K. (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives 18(3): 25-46.
Ferreira, A. L. (2004). Leaning Against Parity. Working Paper Series 04-13, University of Kent.
Ferreira, A. L., and Leon-Ledesma, M. (2007). Does the Real Interest Rate Parity Hold?, Evidence for Emerging and Developing Countries. Journal of International Money and Finance 26(3): 364-382.
Flood, R., and Rose, A. (1996). Fixes: Of The Forward Discount Puzzle. The Review of Economics and Statistics 78(4): 748-752.
Flood, R., and Rose, A. (2002). Uncovered Interest Parity in Crisis. IMF Staff Papers 49(2): 252-266.
Francis, B., Hasan, I., and Hunter, D. (2002). Emerging Market Liberalization and the Impact on Uncovered Interest Rate Parity. Journal of International Money and Finance 21: 931-956.
Frankel, J. (1993). On exchange rates. Cambridge: MIT Press.
Frankel, J., and Okongwu, C. (1996). Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence. International Journal of Finance and Economics 1(1): 1-23.
Frankel, J., and Poonawala, J. (2006). The Forward Market in Emerging Currencies: Less Biased than in Major Currencies. NBER Working Paper No. 12496.
Froot, K. A., Thaler, R. H. (1990). Anomalies: Foreign Exchange. Journal of Economic Perspectives 4: 179-192.
Girard, E., Omran, M. (2007). What are the risks when investing in thin emerging equity markets: Evidence from the Arab world. International Financial Markets, Institutions and Money 17: 102-123.
Goh, S.K, Lim, G.C., and Olekalns, N. (2006). Deviations from uncovered interest parity in Malaysia. Applied Financial Economics 16: 745-759.
Gourinchas, P., and Tornell, A. (2004). Exchange rate puzzle and distorted beliefs. Journal of International Economics 64: 303-333.
Hamilton, J. D., and Susmel, R. (1994). Autoregressive conditional heteroskedasticity and changes in regime. Journal of Econometrics 64(12): 307-333.
Hollifield, B., and Uppal, R. (1997). An Examination of Uncovered Interest Parity in Segmented International Commodity Markets. Journal of Finance 52: 2145-2170.
Holtemoller, O. (2005). Uncovered interest rate parity and analysis of monetary convergence of potential EMU accession countries. International Economics and Economic Policy 2: 33-63.
Huisman, R., Koedijk, K. G., Kool, C., and Nissen, F. (1998). Extreme Support for Uncovered Interest Parity. Journal of International Money and Finance 17: 211-228.
Iqbal, J., and Brooks, R. (2007). Alternative beta risk estimators and asset pricing tests in emerging markets: The case of Pakistan. Journal of Multinational Financial Management 17: 75-93.
Isard, P. (2006). Uncovered Interest Parity. IMF Working Paper No. 06/96.
Juselius, K. (1995). Do purchasing power parity and uncovered interest rate parity hold in the long run? An example of likelihood inference in a multivariate time-series model. Journal of Econometrics 69(1): 211-240.
Kaminsky, G. (1993). Is There a Peso Problem? Evidence from the Dollar/Pound Exchange Rate, 1976-1987. American Economic Review 83(3): 450-472.
Kose, M.A, Prasad, E., Rogoff, K., and Wei, S.-J. (2006). Financial Globalization: A Reappraisal. IMF Working Paper No. 06/189.
Kumhof, M. (2001). International Capital Mobility in Emerging Markets: New Evidence from Daily Data. Review of International Economics 9(4): 626-640.
Lee, B.-J. (2006). Uncovered Interest Parity Puzzle: Cross-sectional and Time-series Analysis. Mimeo, University of Notre Dame.
Lewis, K. (1995). Puzzles in International Financial Markets. In Grossman, G. M. and Rogoff K. (Eds.) The Handbook of International Economics, vol. III. Elsevier Science, Amsterdam, pp. 1913-1971.
Liew, J., and Vassalou, M. (2000). Can Book-to-Market, Size, and Momentum be Risk Factors that Predict Economic Growth? Journal of Financial Economics 57: 221-245.
Liu, W., and Maynard, A. (2005). Testing forward rate unbiasedness allowing for persistent regressors. Journal of Empirical Finance 12: 613-628.
Lyons, R. K. (2001). The Microstructure Approach to Exchange Rates. Cambridge and London: MIT Press.
MacDonald, R. (2000). Expectations Formation and Risk in Three Financial Markets: Surveying what the Surveys Say. Journal of Economic Surveys 14(1): 69-100.
Mansori, K. S. (2003). Following in Their Footsteps: Comparing Interest Parity Conditions in Central European Economies to the Euro Countries, CESifo Working Paper No. 1020.
Marey, P. S. (2004a). Uncovered interest parity tests and exchange rate expectations. Computing in Economics and Finance 54, Society for Computational Economics.
Marey, P. S. (2004b). Exchange rate expectations: controlled experiments with artificial traders. Journal of International Money and Finance 23: 283-304.
Mark, N.C., and Moh, Y.K. (2007). Occasional Interventions and Occasional Violations of Uncovered Interest Parity in the Dollar-DM Market. Journal of Empirical Finance, forthcoming.
Maynard, A., and Phillips, P.C.B. (2001). Rethinking an old empirical puzzle: econometric evidence on the forward discount anomaly. Journal of Applied Econometrics 16(6): 671-708.
Maynard, A. (2006). The forward premium anomaly: statistical artifact or economic puzzle? New evidence from robust tests. Canadian Journal of Economics 39 (3): 1244- 1281.
McCallum, B. T. (1994). A Reconsideration of the Uncovered Interest Parity Relation- ship. Journal of Monetary Economics 33: 105-132.
Misirli, U., and Alper, C. E. (2007). The Drivers of Expected Returns in Istanbul Stock Exchange: Fama-French Factors and Coskewness. Applied Economics, forthcoming.
Mody, A. (2004). What Is An Emerging Market? IMF Working Paper, No. 04/177.
Ozmen, E., and Gokcan, A. (2004). Deviations from PPP and UIP in a financially open economy: the Turkish evidence. Applied Financial Economics 14: 779-784.
Pesaran, H. M., Weale, M. (2006). Survey Expectations. In Elliott, G., Granger C.W.J. and Timmermann A. (Eds.), Handbook of Economic Forecasting, North-Holland.
Poghosyan, T., Kocenda, E., and Zemcik, P. (2007). Modeling Foreign Exchange Risk Premium in Armenia. Emerging Markets Finance and Trade, forthcoming.
Rojas-Suarez, L., and Sotelo, S. (2007). The Burden of Debt: An Exploration of Interest Behavior in Latin America. Contemporary Economic Policy, forthcoming.
Sachsida, A., Ellery Jr., R., and Teixeria, J. R. (2001). Uncovered Interest Rate Parity and the Peso Problem: the Brazilian Case. Applied Economics Letters 8: 179-181.
Sakoulis, G., and Zivot, E. (2005). Time-Variation and Structural Change in the Forward Discount: Implications for the Forward Rate Unbiasedness Hypothesis. Mimeo, Department of Economics, University of Washington.
Sarno, L. (2005). Towards a Solution to the Puzzles in Exchange Rate Economics: Where Do We Stand?. Canadian Journal of Economics 38: 673-708.
Sarno, L., Valente, G., and Leon H. (2006). Nonlinearity in Deviations from Uncovered Interest Parity: An Explanation of the Forward Bias Puzzle. IMF Working Paper No. 06/136.
Schmukler, S. L., and Serven, L. (2002). Pricing Currency Risks under Currency Boards. Journal of Development Economics 69(2): 367-391.
Sercu, P., and Vinaimont, T. (2006). The forward bias in the ECU: Peso risks vs. fads and fashions. Journal of Banking and Finance 30: 2409-2432.
Singh, M., and Banerjee, A. (2006). Testing Real Interest Parity in Emerging Markets. IMF Working Paper No. 06/249.
Tai, C.-S. (2003). Can currency risk be a source of risk premium in explaining forward premium puzzle? Evidence from Asia-Pacific forward exchange markets. International Financial Markets, Institutions and Money 13: 291-311.
Tai, C.-S. (2007). Market integration and contagion: Evidence from Asian emerging stock and foreign exchange markets. Emerging Markets Review, forthcoming.
Tanner, E. (1998). Deviations from Uncovered Interest Parity: A Global Guide to Where the Action is. IMF Working Paper No. 98/117.
Taylor, M. P. (1995). The Economics of Exchange Rates. Journal of Economic Literature 33(1): 13-47.
Verdelhan, A. (2006). A Habit-Based Explanation of the Exchange Rate Risk Premium. Mimeo, Boston University.
Villanueva, O. M. (2005). FX Dynamics, Limited Participation, and the Forward Bias Anomaly. The Financial Review 40: 67-93.
Werner, A. M. (1996). Mexico's Currency Risk Premia in 1992-94: A Closer Look at the Interest Differentials. IMF Working Paper No. 96/41.