Asymmetric Extreme Sampling, Developed Versus Emerging Countries, and the Forward Premium Puzzle

26 Pages Posted: 29 Jul 2011

See all articles by Arjen Mulder

Arjen Mulder

Erasmus University Rotterdam (EUR) - Department of Financial Management

Ben Tims

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Date Written: July 28, 2011

Abstract

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

Suggested Citation

Mulder, Arjen and Tims, Ben, Asymmetric Extreme Sampling, Developed Versus Emerging Countries, and the Forward Premium Puzzle (July 28, 2011). Available at SSRN: https://ssrn.com/abstract=1898164 or http://dx.doi.org/10.2139/ssrn.1898164

Arjen Mulder (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Office T08-35
3000 DR Rotterdam, 3000DR
Netherlands
+31.10.4081929 (Phone)

Ben Tims

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

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