Differential risk premiums and the UIP puzzle
We respecify the uncovered interest rate parity (UIP) conditions by inverting the market price of the risk (Sharpe ratio) formula. Our empirical model provides new insight indicating that violations to the UIP stem from the existence of a risk premium in the exchange rates and from observed market r...
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| Veröffentlicht in: | Financial management 2021-03, Vol.50 (1), p.139-167 |
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| container_end_page | 167 |
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| container_title | Financial management |
| container_volume | 50 |
| creator | Biswas, Rita Piccotti, Louis R. Schreiber, Ben Z. |
| description | We respecify the uncovered interest rate parity (UIP) conditions by inverting the market price of the risk (Sharpe ratio) formula. Our empirical model provides new insight indicating that violations to the UIP stem from the existence of a risk premium in the exchange rates and from observed market return differentials being a noisy statistic of the markets’ expected return differentials in our respecified model. Using an integrated macro‐micro structure framework for expected market return differentials improves our model fit and the validity of UIP. |
| doi_str_mv | 10.1111/fima.12314 |
| format | Article |
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| identifier | ISSN: 0046-3892 |
| ispartof | Financial management, 2021-03, Vol.50 (1), p.139-167 |
| issn | 0046-3892 1755-053X |
| language | eng |
| recordid | cdi_proquest_journals_2495293724 |
| source | Business Source Complete; Wiley Online Library All Journals |
| subjects | Foreign exchange market Foreign exchange rates Interest rate parity theorem Order flows Premiums Risk premium Uncovered interest rate parity Violations |
| title | Differential risk premiums and the UIP puzzle |
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