Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 1997-01-30
Number: 97-014/2
Author-Name: Camiel de Koning
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Stefan Straetmans
Author-Workplace-Name: Erasmus University Rotterdam
Title: Variation in the Slope Coefficient of the Fama Regression for Testing Uncovered Interest Rate Parity: Evidence from Fixed and Time-varying Coefficient Approaches
Abstract: We investigate the potential presence of time variation in the coefficients of the ''Fama regression'' for Uncovered InterestRate Parity. We implement coefficient constancy tests, rolling regression techniques, and stochastic coefficient modelsbased on state space modelling. Among six major US bilateral exchange rates we find significant evidence for stochastictime variation.Using the statistical equivalence between stochastically varying coefficients and conditional heteroscedasticity we derivea proxy for time-varying 'risk', and investigate whether it explains the well known "negative bias" or "foreign discount biaspuzzle" in the foreign exchange rate literature. We contrast our identification scheme to the ARCH-in-mean approach forempirically identifying risk premia.
Keywords: Uncovered interest parity; time-varying coefficients; state space modelling
File-Url: https://papers.tinbergen.nl/97014.pdf
File-Format: application/pdf
File-Size: 262981 bytes
Handle: RePEc:tin:wpaper:19970014