Discussion paper

DP16244 Five Facts about the UIP Premium

We uncovered 5 novel facts on Uncovered Interest Parity (UIP) deviations for 22 emerging markets (EM). The average UIP premium -or the excess currency return- is: 1) always positive with large time-varying volatility; 2) correlates negatively with capital flows; 3) co-moves with global risk sentiments. 4) Using realized exchange rate changes or expected changes from survey data delivers the same result. 5) Policy uncertainty is the underlying primitive, capturing the high-frequency-variation in the UIP deviations, since country and currency risk are both captured by the interest rate differentials. Only fact (3) holds for advanced countries' excess currency returns.


Kalemli-Ozcan, S and L Varela (2022), ‘DP16244 Five Facts about the UIP Premium‘, CEPR Discussion Paper No. 16244. CEPR Press, Paris & London. https://cepr.org/publications/dp16244