Another Look at the Uncovered Interest Rate Parity : Have We Missed the Fundamentals?

In this paper we uncover a version of the uncovered interest parity condition nesting in a portfolio balance model of the consumption capital asset pricing variety. In particular, the model we present explains and supports the existence of quot;excess returnsquot; - returns in excess of those explained by UIP. This is good news for the UIP and the CCAPM considering that, to quote MacDonald (1995), quot;...researchers have been unable to find a statistically significant link between the excess of relative interest rates over the expected exchange rate change (the risk premium)...quot