Uncovered equity parity: new evidence from a copula approach

초록

This article finds novel evidence on the uncovered equity parity (UEP) condition by employing copula methodology with historical datasets spanning back to 1870. First, across 17 advanced countries over the twentieth century, a higher equity return currency tends to depreciate in real terms at an annual frequency. Moreover, we also find a statistically significant positive tail dependence between the real equity returns differential and the real exchange rate differential. That is, when real currency returns and real equity returns take extreme values, they tend to co-move in the same direction, implying a time-varying UEP condition that is also confirmed by our time-varying Student-t copula estimation. Our novel findings call for richer theoretical explanations on the UEP relationship.

키워드