A multivariate GARCH in mean approach to testing uncovered interest parity: evidence from Asia-Pacific foreign exchange markets |
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| Institution: | 1. Department of Economics and Finance, College of Business Administration, Texas A&M University-Kingsville, MSC 186, Kingsville, TX 78363-8203, USA;1. Jaguar Conservation Fund/ Instituto Onça-Pintada, Caixa Postal 193, 75830-000, Mineiros-GO, Brazil;2. Departamento de Medicina Veterinária Preventiva e Saúde Animal, Faculdade de Medicina Veterinária e Zootecnia, Universidade de São Paulo, Av. Prof. Dr. Orlando Marques de Paiva, 87, 05508-000, São Paulo-SP, Brazil;3. Instituto de Biociências, Departamento de Parasitologia, Universidade Estadual Paulista, Campus de Botucatu, Distrito de Rubião Júnior, 18618-000, Botucatu-SP, Brazil;4. Instituto de Biologia, Instituto de Ciências Biomédicas, Universidade Federal de Uberlândia, R. Ceará, s/n, 38400-902, Uberlândia-MG, Brazil;1. School of Chemistry, Institute of Science, Suranaree University of Technology, Nakhon Ratchasima 30000, Thailand;2. Synchrotron Light Research Institute (Public Organization), Nakhon Ratchasima 30000, Thailand;3. National Energy Technology Center, National Sicence and Technology Development Agency 114 Thailand Science Park, Phahonyothin Road, Klong Nueng, Klong Luang, Pathum Thani 12120, Thailand;1. State Key Laboratory of Electronic Thin Films and Integrated Devices, University of Electronic Science and Technology of China (UESTC), Chengdu, 610054, China;4. Department of Electrical Engineering, University of South Africa, Pretoria 0001, South Africa;1. SAP Switzerland, Products & Innovation, Research, Regensdorf, Switzerland;2. University of Bern, Communication and Distributed Systems, Bern, Switzerland;1. Fanhai International School of Finance and School of Economics, Fudan University, China;2. Chinese University of Hong Kong, Hong Kong;3. School of Economics and Lee Kong Chian School of Business, Singapore Management University, Singapore |
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| Abstract: | The existence of time-varying risk premia in deviations from uncovered interest parity (UIP) is investigated based on a conditional capital asset pricing model (CAPM) using data from four Asia-Pacific foreign exchange markets. A parsimonious multivariate generalized autoregressive conditional heteroskedasticity in mean (GARCH-M) parameterization is employed to model the conditional covariance matrix of excess returns. The empirical results indicate that when each currency is estimated separately with an univariate GARCH-M parameterization, no evidence of time-varying risk premia is found except Malaysian ringgit. However, when all currencies are estimated simultaneously with the multivariate GARCH-M parameterization, strong evidence of time-varying risk premia is detected. As a result, the evidence supports the idea that deviations from UIP are due to a risk premium and not to irrationality among market participants. In addition, the empirical evidence found in this study points out that simply modeling the conditional second moments is not sufficient enough to explain the dynamics of the risk premia. A time-varying price of risk is still needed in addition to the conditional volatility. Finally, significant asymmetric world market volatility shocks are found in Asia-Pacific foreign exchange markets. |
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