Title

Can Time-Varying Risk Premiums Explain The Excess Returns In The Interest Rate Parity Condition?

Keywords

Forward premium puzzle; Time-varying risk premium; Uncovered interest rate parity

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. © 2014 Elsevier B.V.

Publication Date

3-1-2014

Publication Title

Emerging Markets Review

Volume

18

Number of Pages

78-100

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.ememar.2014.01.002

Socpus ID

84893764887 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84893764887

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