UIP: A Partial Reconciliation from Event Studies

44 Pages Posted: 23 Apr 2021 Last revised: 7 Sep 2021

See all articles by Luis Ceballos

Luis Ceballos

Pennsylvania State University - Department of Finance

Elias Albagli

University of Southern California - Marshall School of Business; Central Bank of Chile

Sebastián Claro

Pontificia Universidad Catolica de Chile; Central Bank of Chile

Damián Romero

Central Bank of Chile

Date Written: April 20, 2021

Abstract

We develop a model where foreign investors in domestic markets react partially to deviations from a UIP condition for long-term bonds. The model predicts that the sign between yield differentials and exchange rate movements is conditional on the source of shocks. Using event studies for identification, we test the model in a sample of 24 developed and emerging economies, finding a UIP-consistent correlation for monetary shocks, but the opposite around episodes of large market uncertainty. The model predicts that exchange rate stabilization policies, prevalent among emerging countries, weaken both correlations, which we confirm in the data.

Keywords: uncovered interest parity, long-term yields, event studies

JEL Classification: F30, F31, G12, G15

Suggested Citation

Ceballos, Luis and Albagli, Elias and Claro, Sebastian and Romero, Damián, UIP: A Partial Reconciliation from Event Studies (April 20, 2021). Available at SSRN: https://ssrn.com/abstract=3830716 or http://dx.doi.org/10.2139/ssrn.3830716

Luis Ceballos (Contact Author)

Pennsylvania State University - Department of Finance ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.luisceballoss.com/

Elias Albagli

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States
56987096932 (Phone)

HOME PAGE: http://www.marshall.usc.edu/faculty/directory/albagli

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

Sebastian Claro

Pontificia Universidad Catolica de Chile ( email )

Casilla 76
Correo 17
Santiago
Chile

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

Damián Romero

Central Bank of Chile

Publicaciones
Huerfanos 1185
Santiago
Chile

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