The Uncovered Interest Parity in the Foreign Exchange (FX) Markets
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Abstract
This work verifies the uncovered interest rates parity (UIP) in the FX (foreign exchange) emerging markets by using the panel cointegration technique. The data involves several developing countries that compose the EMBI+ Global Index. We compare the results of several panel estimators: OLS (ordinary list square), DOLS (dynamic OLS) and FMOLS (fully modified OLS). This new panel technique can handle problems of either non-stationary series (spurious regression) or small problem. This latter problem has being considered one of the main causes for distorting the UIP empirical results. By using this approach, we check the UIP in the FX (foreign exchange) emerging markets. These markets are more critical because they have been subjected to changing FX regimes and speculative attacks. Our results do not corroborate the uncovered interest parity for the developing countries in the recent years. Thus, the forward premium puzzle may hold in the FX emergent markets.
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