FRB: Uncovered Interest Parity: It Works, But Not For Long

International Finance Discussion Papers

Uncovered Interest Parity: It Works, But Not For Long
Alain P. Chaboud; Jonathan H. Wright
2003-752 (January 2003, latest version June 2003)

Abstract: If an investor borrows in a low interest currency and invests in a high interest currency, the interest differential accrues in a lumpy manner. The investor will receive the interest differential at the point when a position is rolled over from one day to the next. A position that is not held open overnight receives no interest differential because intradaily interest rates are zero. Using a larget dataset of 5 minute exchange rate data, we run uncovered interest parity regressions over different short time intervals taking careful account of the settlement rules in the spot foreign exchange market. We find results that are supportive of the uncovered interest parity hypothesis over very short windows of data that span the time of the discrete interest payment.

Full paper, latest version (274 KB PDF) | Original version (169 KB PDF)

Keywords
uncovered interest parity, high frequency data, exchange rates, risk premia

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