The Uncovered Interest Parity Puzzle and Other Anomalies
Chapter 9: Summary and future work
This chapter summarizes the material from the previous chapters, and it makes several suggestions for future work. First, it restates the objectives of this book. Then it reviews the essential features of the alternative UIP frameworks developed in Chapters 5, 6 and 8. This is followed by a list of all the puzzling facts and anomalies investigated here. Then comes a summary of the book’s explanations for each of the puzzles. The chapter ends with suggestions for future work. One objective has been to list and summarize many puzzling facts and anomalies associated with exchange rates, and to review existing explanations for each. Section 9.3 contains a list of the ten puzzles given in Chapter 1, and six others addressed in Chapters 7 and 8. The primary objective of this book has been to develop UIP frameworks that are consistent with these puzzles. These are Synthesis Model I in Chapter 5, Synthesis Model II in Chapter 6, and a regressive expectations UIP model in Chapter 8. Each of these models is intertemporal in nature. Traditional thinking about UIP is consistent with the assumption that investors have a speculative time horizon of only one period. In contrast, the intertemporal approach allows carry-trade to encompass many time periods. Ex ante intertemporal UIP holds when the anticipated cumulative net interest from carry-trade over the optimum speculative time horizon, n(t), is offset by the anticipated cumulative depreciation of the high interest rate currency over the same time horizon.
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