Long-run Uncovered Interest Parity in Emerging Markets

Much of the literature finds that uncovered interest parity (UIP) tends to hold at long horizons for advanced-economy currencies. Whether it holds in emerging markets remains a more open question. We show it does not, and that sovereign credit risk can explain the failure. Using monthly zero-coupon local-currency yield curves for all emerging market currencies for which they are available from 2000 to 2025, we find that the slope of long-horizon UIP regressions is well below one at the five-year maturity for emerging market currencies, while unity cannot be rejected for G10 currencies. However, when we augment these regressions with sovereign CDS spreads, this slope rises to values statistically indistinguishable from one for floating emerging market currencies. The correction works best for currencies whose credit risk is most variable. A no-arbitrage asset pricing framework guides the specification of the regressions and the interpretation of the results.