Uncovered interest rate parity on the Japanese yen exchange rate market


  • Katarzyna Czech Warsaw University of Life Sciences




uncovered interest rate parity, exchange rate market, Japanese yen, currency speculation strategy „carry trade”


The aim of the paper is to verify the uncovered interest rate parity hypothesis on the Japanese yen exchange rate market. The article describes the theory of uncovered interest rate parity and presents the review of previous research results. Moreover, the paper characterizes the currency speculation strategy ?carry trade? which is fundamentally based on the assumption that the uncovered interest rate parity doesn?t hold. The Japanese yen is one of the most popular ?carry trade? funding currency and therefore the article is focused on the analysis of this exchange rate market.The uncovered interest rate parity condition suggests that ?carry trade? strategy should not result in excess profits. However, the high average payoff to ?carry trade? is widely documented by many researchers and thus it may imply that uncovered interest rate parity doesn?t hold on the Japanese yen market. The uncovered interest rate parity on the Japanese yen market is tested by applying the conventional regression approach and orthogonality test of the forward rate forecast error. The results show that it is hard to say definitely that uncovered interest rate parity holds on the analyzed exchange rate market. The uncovered interest rate parity hypothesis is rejected for JPY/TRY market. However, there is not enough evidence to reject UIP hypothesis for JPY/NZD and JPY/USD exchange rate markets.


Download data is not yet available.


Alexius A. (2001), Uncovered Interest Parity Revisited, ?Review of International Economics?, Vol. 9, No. 3.
Baillie R. T., Chang S. S. (2011), Carry Trades, Momentum Trading and the Forward Premium Anomaly, ?Journal of Financial Markets?, No. 14.
Burnside C., Eichenbaum M., Kleshchelski I., Rebelo S. (2006), The Returns to Currency Speculation, ?NBER Working Paper Series?, No. 12489.
Chinn M.D., Meredith G. (2005), Testing Uncovered Interest Parity at Short and Long Horizons During the Post-Bretton Woods Era, ?NBER Working Paper Series?, No. 11077.
Darvas Z. (2009), Leveraged Carry Trade Portfolios, ?Journal of Banking & Finance?, No. 33.
Fama E. F. (1984), Forward and Spot Exchange Rates, ?Journal of Monetary Economics?, No. 14.
Flood R. P., Rose A. K. (2002), Uncovered Interest Parity in Crisis, ?International Monetary Fund Staff Papers?, Vol. 49, No. 2.
Fong W. M. (2010), A Stochastic Dominance Analysis of Yen Carry Trade, ?Journal of Banking & Finance?, No. 34.
Froot K. A., Frankel J. A. (1989), Forward Discount Bias: Is it an Exchange Risk Premium?, ?The Quarterly Journal of Economics?, No. 104.
Froot K. A., Thaler R. H. (1990), Anomalies: Foreign Exchange, ?The Journal of Economic Perspectives?, Vol. 4, No. 3.
Hansen L. P., Hodrick R. J. (1980), Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis, ?Journal of Political Economy?, Vol. 88, No. 5.
Lothian J. R., Wu L. (2011), Uncovered Interest-Rate Parity Over the Past Two Centuries, ?Journal of International Money and Finance?, No. 30.
McCallum B. T. (1994), A Reconsideration of the Uncovered Interest Parity Relationship, ?Journal of Monetary Economics?, No. 33.
Sarno L., Valente G., Leon H. (2006), Nonlinearity in Deviations from Uncovered Interest Parity: An Explanation of the Forward Bias Puzzle, ?Review of Finance?, No. 10.
Wdowiński P. (2010), Modele kursów walutowych, Wydawnictwo Uniwersytetu Łódzkiego, Łódź.




How to Cite

Czech, K. (2012). Uncovered interest rate parity on the Japanese yen exchange rate market. Oeconomia Copernicana, 3(3), 63–77. https://doi.org/10.12775/OeC.2012.015




Similar Articles

1 2 3 4 5 6 7 8 9 10 > >> 

You may also start an advanced similarity search for this article.