Uncovered Interest Parity in High Frequency

Abstract:

We examine violations of uncovered interest parity (UIP) in high frequency, accounting for the discrete nature of interest rate payments in foreign exchange markets. Exploiting both regression-and portfolio-based tests, we do not reject UIP during overnight trading but strongly do so during the U.S. intraday period. Furthermore, we document a strong divergence in excess returns for currency trading strategies exploiting UIP violations on announcement versus non-announcement days. The cross-sectional carry strategy earns the bulk of its excess returns on macro and FOMC days, whereas the dollar carry strategy generates positive returns on non-announcement days and depreciates on announcement days.

Link to paper