  We suggest a new single-equation test for Uncovered Interest Parity (UIP)
based on a dynamic regression approach. The method provides consistent and
asymptotically efficient parameter estimates, and is not dependent on
assumptions of strict exogeneity. This new approach is asymptotically more
efficient than the common approach of using OLS with HAC robust standard errors
in the static forward premium regression. The coefficient estimates when spot
return changes are regressed on the forward premium are all positive and
remarkably stable across currencies. These estimates are considerably larger
than those of previous studies, which frequently find negative coefficients.
The method also has the advantage of showing dynamic effects of risk premia, or
other events that may lead to rejection of UIP or the efficient markets
hypothesis.
