Rabitsch, Katrin. 2016. An Incomplete Markets Explanation of the UIP Puzzle. Review of International Economics 24 (2), 422-446.

RIS

@ARTICLE{Rabitsch-Schilcher2016,
title = {An Incomplete Markets Explanation of the UIP Puzzle},
author = {Katrin Rabitsch-Schilcher},
year = {2016},
doi = {http://dx.doi.org/10.1111/roie.12220},
url = {http://dx.doi.org/10.1111/roie.12220},
volume = {24},
number = {2},
language = {EN},
pages = {422-446},
journal = {Review of International Economics},
abstract = {A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a time-varying 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.},
}