Testing Uncovered Interest Parity: A Continuous‐Time Approach

37 Pages Posted: 25 Nov 2011

See all articles by Antonio Diez de los Rios

Antonio Diez de los Rios

Bank of Canada

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Date Written: November 2011

Abstract

Nowadays researchers can choose the sampling frequency of exchange rates and interest rates. If the degree of overlap is large relative to the sample size, standard GMM asymptotic theory provides unreliable inferences in uncovered interest parity (UIP) regression tests. We specify a continuous‐time model for exchange rates and forward premia robust to temporal aggregation, unlike existing discrete‐time models. We test the UIP restrictions on the continuous‐time model parameters and propose a novel specification test that compares estimators at different frequencies. Our results based on correctly specified models provide little support for UIP at both short and long horizons.

Suggested Citation

Diez de los Rios, Antonio and Sentana, Enrique, Testing Uncovered Interest Parity: A Continuous‐Time Approach (November 2011). International Economic Review, Vol. 52, Issue 4, pp. 1215-1251, 2011. Available at SSRN: https://ssrn.com/abstract=1964491 or http://dx.doi.org/10.1111/j.1468-2354.2011.00665.x

Antonio Diez de los Rios (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

Houghton Street
London School of Economics & Political Science (LSE)
London WC2A 2AE
United Kingdom
+44 20 7955 7002 (Phone)
+44 20 7852 3580 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
936
PlumX Metrics