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Some Specification Tests of Uncovered Interest Parity

Published online by Cambridge University Press:  17 August 2016

Ian D. McAvinchey  and
Ronald MacDonald
Ian D. McAvinchey
Affiliation:
University of Aberdeen
Ronald MacDonald
Affiliation:
University of Dundee
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Summary

Exchange rate theory has recently been concerned with versions of the uncovered interest rate parity (UIP) condition, as an alternative to purchasing power parity. The UIP condition is examined, for the U.S. Dollar, the Deutschemark, the Yen, and the Swiss Franc all against the Pound Sterling, using dynamic specification tests based on residual from the LUS and OLS classes, and selected error orthogonality tests. Market errors for one currency may have an information role for other currencies, this also is tested. It is suggested that spot rates are determined by the same underlying process which requires a considerable amount of past information on market errors for efficient spot rate determination. A role for time varying risk premia is suggested.

Résumé

Résumé

La théorie des taux de change s'est récemment intéressé à diverses versions de la condition de parité non couverte des taux d'intérêt comme alternative à la théorie de la parité de pouvoir d'achat. L'article examine cette condition pour le Dollar américain, le Deutschemark, le Yen et le Franc suisse par rapport à la Livre anglaise en recourant à des tests de spécification dynamiques basés sur les résidus LUS et OLS et à des tests d'orthogonalité. On teste également l'hypothèse que des erreurs de marché pour une devise aient un rôle d'information pour les autres devises.

L'étude suggère que les taux au comptant sont tous déterminés par le même processus sous-jacent, ce qui, pour une détermination efficiente des taux au comptant, requiert un nombre considérable d'information sur les erreurs de marché antérieures. L'article analyse également l'introduction d'une prime de risque variant dans le temps.

Keywords

132211431132211431
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 56 , Issue 1 , 1990 , pp. 61 - 78
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1990 

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Footnotes

*

We are indebted to an anonymous referee for comments on an earlier version of this paper. The usual disclaimer applies.

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