A useful working paper has provided an extensive summary and new facts concerning the risk premium (forward bias) associated with uncovered interest rate parity. The working paper "Five Facts About the UIP Premium" provides new insights on issues that have been plaguing currency markets for decades. This is a long piece, so we have provided a summary table for the key conclusions.
The key take-aways are twofold: one, do not treat developed markets the same way as emerging markets, their UIP behaviors are different; and two, the risk premia are associated with VIX and country risks that should be included in any measure of UIP. These issues have been discussed in other papers, but the authors proved a unified analysis that addressed the key drivers of UIP.
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