An incomplete markets explanation of the UIP puzzle

Arbeitspapier

A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a timevarying risk premium. This paper presents a mechanism in a simple two-country two-good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a parameterization where international wealth effects are important, liquidity constraints on an internationally traded bond and agents' strong resulting precautionary motives successfully generates a time-varying risk premium: countries that have accumulated large outstanding external positions have, being closer to the constraints, stronger precautionary motives and their asset carries a risk premium.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: FinMaP-Working Paper ; No. 53

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Foreign Exchange ; Open Economy Macroeconomics ; Asset Pricing; Trading Volume; Bond Interest Rates ; International Financial Markets
• Thema: Uncovered Interest Rate Parity ; Incomplete Markets Precautionary Savings ; Time-Varying Risk Premium

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Rabitsch, Katrin
• Ereignis: Veröffentlichung
• (wer): Kiel University, FinMaP - Financial Distortions and Macroeconomic Performance
• (wo): Kiel
• (wann): 2016

Weitere Informationen

• Handle: http://hdl.handle.net/10419/125825
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ