Title

Can time-varying risk premiums explain the excess returns in the interest rate parity condition?

Authors

Authors

U. Aysun;S. Lee

Comments

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Abbreviated Journal Title

Emerg. Mark. Rev.

Keywords

Uncovered interest rate parity; Forward premium puzzle; Time-varying; risk premium; UNCOVERED INTEREST PARITY; EMERGING MARKETS; PREDICTABILITY; PUZZLES; MODELS; TESTS; HOLD; US; Business, Finance; Economics

Abstract

This paper shows that the deviations from the UIP condition are equally large in advanced and emerging market economies. Using monthly data, and a GARCH-M model we find that a large share of these deviations in both country groups are explained by time-varying risk premium. To more clearly identify risk premium shocks, we then estimate a two-country, New Keynesian, DSGE model using a Bayesian methodology and quarterly data. The results suggest that at the quarterly frequency, the large deviations from the UIP condition and the high explanatory power of risk premium are only observed for emerging market economies. (C) 2014 Elsevier B.V. All rights reserved.

Journal Title

Emerging Markets Review

Volume

18

Publication Date

1-1-2014

Document Type

Article

Language

English

First Page

78

Last Page

100

WOS Identifier

WOS:000335423800006

ISSN

1566-0141

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