EXTREME SUPPORT FOR UNCOVERED INTEREST PARITY

Concerning UIP, the common conclusion is that it may be valid but unde tectable for many reasons. In this paper we take a complementary route in that we base our methodology on a random time effects panel model that controls for various biasing factors and which is invariant to th e choice of the numeraire currency. We show that the rejection of UIP is not as severe as is commonly found and that it almost perfectly hol ds in periods where the forward premiums are large. (C) 1998 Elsevier Science Ltd. All rights reserved.