DEVIATIONS FROM UNCOVERED INTEREST RATE PARITY; FOREIGN EXCHANGE RATE RISK PREMIUM OR BIAS IN EXPECTATIONS

In this project focus on how risk and risk aversion determine the degree of capital mobility between currencies. Most tests of perfect capital mobility test for uncovered interest rate parity. Uncovered interest rate parity is one of the fundamental theoretical building blocks for understanding the behaviour of returns in international financial markets. Uncovered interest rate parity links the expected future path of the exchange rate to relative nominal interest rates. The purpose of this research is to review and extend empirical evidence on this classical parity relationship within a rational expectation framework.