Premium
An Examination of Uncovered Interest Rate Parity in Segmented International Commodity Markets
Author(s) -
HOLLIFIELD BURTON,
UPPAL RAMAN
Publication year - 1997
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1997.tb02756.x
Subject(s) - economics , covariance , econometrics , commodity , exchange rate , spot contract , contrast (vision) , interest rate , interest rate parity , monetary economics , financial economics , mathematics , statistics , futures contract , physics , market economy , optics
We examine the effect of segmented commodity markets on the relation between forward and future spot exchange rates in a dynamic economy. We calculate the slope coefficient in our theoretical economy from regressing exchange rate changes on forward premia. With reasonable parameter values, the slope coefficient is less than unity. However, even for extreme parameters the slope is not less than zero, as found in the data. A negative slope coefficient in a nominal version of the model requires the covariance between monetary shocks and relative output shocks to be significantly negative, in contrast to the covariance in the data.