Asymmetric Extreme Sampling, Developed Versus Emerging Countries, and the Forward Premium Puzzle
26 Pages Posted: 29 Jul 2011
Date Written: July 28, 2011
We analyse the validity of UIP in a panel of 41 currencies over the time window 1975-2010. We confirm that in general UIP does not hold for developed countries, whereas it does hold for emerging countries. This result is found for various metrics of ‘developed’ and ‘emerging’ countries (IMF country classification, per capita GNI, inflation, inflation volatility). We confirm that UIP may hold in the extremes for developed countries, but this result is only found in the right-hand side tail of interest rate differentials (IRDs). Contrasting with earlier work (that assumed absolute IRDs) our findings suggest an asymmetric relationship. For emerging countries we find an inverse relationship, namely UIP does not hold in the extremes but it does hold in the centre 80% of observations.
Keywords: Uncovered interest parity, asymmetric extreme sampling, developed and emerging markets
JEL Classification: F31
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