Title: What UIP tests on extreme samples reveal about the missing variable
Authors: Sercu, Piet ×
Vandebroek, Martina #
Issue Date: Dec-2005
Series Title: Journal of International Money and Finance vol:24 issue:8 pages:1237-1260
Abstract: In their UIP regressions, Huisman et al. (1998. Extreme support for uncovered interest parity, Journal for International Money and Finance 17, 211-228.) focus on extreme forward premia and find much higher coefficients. We show that, for such results, the expectation signal needs to be thicker-tailed than the missing variable. Transaction costs may produce the right sort of bias. It is (i) bounded (i.e. it has no tails at all), (ii) wide (i.e. it may generate betas below 1/2) and (iii) U-distributed, which makes an "extreme" sample quite effective. We derive theoretical and numerical results in the direction of what Huisman et al. observe. We also tighten Fama's moment conditions. (c) 2005 Published by Elsevier Ltd.
ISSN: 0261-5606
Publication status: published
KU Leuven publication type: IT
Appears in Collections:Research Center International Finance, Leuven
Research Center for Operations Research and Business Statistics (ORSTAT), Leuven
× corresponding author
# (joint) last author

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