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A New Test for Market Efficiency and Uncovered Interest Parity / Richard T. Baillie, Francis X. Diebold, George Kapetanios, Kun Ho Kim.
- Format:
- Book
- Author/Creator:
- Baillie, Richard T.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w30638.
- NBER working paper series no. w30638
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2022.
- Summary:
- We suggest a new single-equation test for Uncovered Interest Parity (UIP) based on a dynamic regression approach. The method provides consistent and asymptotically efficient parameter estimates, and is not dependent on assumptions of strict exogeneity. This new approach is asymptotically more efficient than the common approach of using OLS with HAC robust standard errors in the static forward premium regression. The coefficient estimates when spot return changes are regressed on the forward premium are all positive and remarkably stable across currencies. These estimates are considerably larger than those of previous studies, which frequently find negative coefficients. The method also has the advantage of showing dynamic effects of risk premia, or other events that may lead to rejection of UIP or the efficient markets hypothesis.
- Notes:
- Print version record
- November 2022.
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