Another look at the uncovered interest rate parity: Have we missed the fundamentals?

We present a version of the uncovered interest parity condition nesting in a portfolio balance model of the consumption capital asset pricing variety. This model supports the existence of “excess returns”-returns in excess of those explained by UIP.

► We derive a version of UIP nesting in a portfolio balance model of the CCAPM variety. ► Our version focuses on “excess returns”-returns in excess of those explained by UIP. ► We find that the data lends strong support to our theoretical model.