Uncovered Interest Parity: It Works, But Not for Long

24 Pages Posted: 24 Apr 2003

See all articles by Alain Chaboud

Alain Chaboud

Board of Governors of the Federal Reserve System

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: January 2003

Abstract

The failure of uncovered interest parity can be ascribed to the existence of a risk premium. The size of this risk premium may shrink to zero over sufficiently small intervals of time. In contrast, because no interest is paid on intradaily positions and interest is instead paid discretely at the point when a position is rolled over from one day to the next, the size of the interest differential remains fixed over any interval that covers the time of the discrete interest payment. This is true no matter how short that interval is. Using a large dataset of high frequency exchange rate data, we run uncovered interest parity regressions over different time intervals. We replicate the rejection of uncovered interest parity with daily data, but find results that are consistently much more supportive of the uncovered interest parity hypothesis over short windows of intradaily data that span the time of the discrete interest payment.

Keywords: uncovered interest parity, high frequency data, exchange rates, risk premia

JEL Classification: C22, F31

Suggested Citation

Chaboud, Alain and Wright, Jonathan H., Uncovered Interest Parity: It Works, But Not for Long (January 2003). Available at SSRN: https://ssrn.com/abstract=370382 or http://dx.doi.org/10.2139/ssrn.370382

Alain Chaboud

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452 3756 (Phone)

Jonathan H. Wright (Contact Author)

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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