Interest Rate Parity and the Exchange Risk Premium

  title={Interest Rate Parity and the Exchange Risk Premium},
  author={E. Scott Mayfield and Robert G. Murphy},
This paper provides evidence that a time-varying risk premium is responsible for the rejection of the interest rate parity theory. We us a panel data set of returns on the Eurocurrency deposits and employ cross-section / time series methods to account for common movements in risk premia across deposits denominated in different currencies.