Five Facts about the UIP Premium
We introduce a new measure of currency risk for emerging markets, the UIP premium, and highlight five key insights into its cross-sectional and time-series properties. We derive the UIP premium from survey data on exchange rate expectations and show that it captures a substantial local risk factor, as evidenced by: (1) The UIP premium for emerging markets is consistently positive, higher, and more volatile than the UIP premium for advanced economies; (2) A significant portion of cross-sectional and time-series variation in the UIP premium is driven by local risk factors; (3) The interest rate differential component of the UIP premium is more volatile and strongly correlated with local risk factors; (4) Local and global risk factors influence exchange rate expectations, which closely align with actual exchange rate movements; (5) The local risk factor is associated with country-specific policy shocks, where such policy uncertainty can predict persistent expectations of depreciations.