This paper develops a perfectly general non-linear Uncovered Interest Parity, UIP, framework with foreign exchange (fx) market inefficiency. The latter means that there is always some “unexploited profit” which tends to generate a negative value for Fama's beta coefficient. However, as ID...

The Uncovered Interest Parity (UIP) puzzle has remained a moot point since it first circulated economic discourse in 1984 and, despite a number of attempts at a solution, the UIP puzzle and other anomalies in Exchange Rate Economics continue to perplex economic thought in international finance....

The paper develops a flow model of the exchange rate with speculative capital flows integrated in a rigorous manner. The model is consistent with five foreign exchange market puzzles: (1) occasional discontinuous jumps in the exchange rate; (2) periodic short-term regimes of persistent...