The Uncovered Interest Parity Puzzle

Abstract

Uncovered interest parity (UIP) is one of the key assumptions in economic and finance when modelling exchange rates. However, previous empirical literature has offered little support for the theory, almost constantly rejecting it. A recent study, though, came up with results supporting it, suggesting the financial crisis of 07’ could have played a vital role. This thesis investigates UIP between the Swedish and American currencies for the years 1993 to 2024, divided into two periods, before and after the financial crisis. The results of the study are similar to the ones mentioned above, indicating a clear trend breaking after the financial crisis. The results show that UIP has existed between the two currencies after the financial crisis, as opposed to the first period. Also, the findings of this thesis, together with those of other studies listed, offer support to the possibility of an overall change in UIP after the financial crisis.