Long-Horizon Uncovered Interest Rate Parity PDF Download
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Author: Guy Meredith
Publisher:
ISBN:
Category :
Languages : en
Pages : 34
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Book Description
Uncovered interest parity (UIP) has been almost universally rejected in studies of exchange rate movements, although there is little consensus on why it fails. In contrast to previous studies, which have used relatively short-horizon data, we test UIP using interest rates on longer-maturity bonds for the G-7 countries. These long-horizon regressions yield much more support for UIP -- all the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to the zero coefficient implied by the random walk hypothesis. We then use a small macroeconomic model to explain the differences between the short- and long-horizon results. Regressions run on data generated by stochastic simulations replicate the important regularities in the actual data, including the sharp differences between short- and long-horizon parameters. In the short run from risk premium shocks in the face of endogenous monetary policy. In the long run, in contrast, exchange rate movements are driven by the quot;fundamentals,quot; leading to a relationship between interest rates and exchange rates that is more consistent with UIP.
Author: Guy Meredith
Publisher:
ISBN:
Category :
Languages : en
Pages : 34
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Book Description
Uncovered interest parity (UIP) has been almost universally rejected in studies of exchange rate movements, although there is little consensus on why it fails. In contrast to previous studies, which have used relatively short-horizon data, we test UIP using interest rates on longer-maturity bonds for the G-7 countries. These long-horizon regressions yield much more support for UIP -- all the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to the zero coefficient implied by the random walk hypothesis. We then use a small macroeconomic model to explain the differences between the short- and long-horizon results. Regressions run on data generated by stochastic simulations replicate the important regularities in the actual data, including the sharp differences between short- and long-horizon parameters. In the short run from risk premium shocks in the face of endogenous monetary policy. In the long run, in contrast, exchange rate movements are driven by the quot;fundamentals,quot; leading to a relationship between interest rates and exchange rates that is more consistent with UIP.
Author: Menzie David Chinn
Publisher:
ISBN:
Category : Economics
Languages : en
Pages :
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Book Description
We review the evidence for both short and long horizon uncovered interest parity (UIP) and rational expectations over the period up to 2011, extending the sample examined in Chinn and Meredith (2004) by nearly a decade. We find that the joint hypothesis of UIP and rational expectations (known as the unbiasedness hypothesis) holds better at long horizons than at short, although the effect is somewhat weaker than documented in Chinn and Meredith (2004). Using the formula for the slope coefficient, we identify potential sources for the difference in slope coefficients at different horizons. We attribute our weaker findings for long horizon unbiasedness for certain currencies partly to the advent of extraordinarily low interest rates associated with the zero interest bound in Japan and Switzerland.
Author: Menzie David Chinn
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
The unbiasedness hypothesis - the joint hypothesis of uncovered interest parity (UIP) and rational expectations - has been almost universally rejected in studies of exchange rate movements. In contrast to previous studies, which have used short-horizon data, we test this hypothesis using interest rates on longer-maturity bonds for the G-7 countries. The results of these long-horizon regressions are much more positive - the coefficients on interest differentials are of the correct sign, and almost all are closer to the predicted value of unity than to zero. These results are robust changes in data type and to base currency (i.e., Deutschemark versus US dollar). We appeal to an econometric interpretation of the results, which focuses on the presence of simultaneity in a cointegration framework.
Author: Menzie David Chinn
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
The hypothesis that interest rate differentials are unbiased predictors of future exchange rate movements has been almost universally rejected in empirical studies. In contrast to previous studies, which have used short-horizon data, we test this hypothesis using interest rates on longer-maturity bonds for the U.S., Germany, Japan and Canada. The results of these long-horizon regressions are much more positive - the coefficients on interest differentials are of the correct sign, and most are closer to the predicted value of unity than to zero. We appeal to an econometric interpretation of the results, which focuses on the presence of simultaneity in a cointegration framework.
Author: Arnaud Mehl
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper estimates uncovered interest parity (UIP) at long horizons using bilateral US dollar rates vis-à-vis mature economy and emerging market currencies. The paper finds support in favor of UIP for dollar rates vis-à-vis major mature economy currencies, but far less against emerging market currencies. There are also signs that political risk and the exchange risk premium help explain the empirical failure of UIP for these latter currencies. This suggests that whether UIP holds depends more on the currency than on the horizon.
Author: Mr.Eugenio M Cerutti
Publisher: International Monetary Fund
ISBN: 1484395212
Category : Business & Economics
Languages : en
Pages : 36
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Book Description
For about three decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possible temporary considerations (such as asynchronous monetary policy cycles).
Author: Alain P. Chaboud
Publisher:
ISBN:
Category : Interest rates
Languages : en
Pages : 32
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Book Description
Author: Geert Bekaert
Publisher:
ISBN:
Category : Economics
Languages : en
Pages : 31
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Book Description
This paper examines uncovered interest rate parity (UIRP) and the expectations hypotheses of the term structure (EHTS) at both short and long horizons. The statistical evidence against UIRP is mixed and is currency- not horizon-dependent. Economically, the deviations from UIRP are less pronounced than previously documented. The evidence against the EHTS is statistically more uniform, but, economically, actual spreads and theoretical spreads (spreads constructed under the null of the EHTS) do not behave very differently, especially at long horizons. Partly because of this, the deviations from the EHTS only play a minor role in explaining deviations from UIRP at long horizons. A random walk model for both exchange rates and interest rates fits the data marginally better than the UIRP-EHTS model
Author: Guy Meredith
Publisher:
ISBN:
Category : Foreign exchange rates
Languages : en
Pages : 50
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Book Description
Uncovered interest parity (UIP) has been almost universally rejected in studies of exchange rate movements, although there is little consensus on why it fails. In contrast to previous studies, which have used relatively short-horizon data, we test UIP using interest rates on longer-maturity bonds for the G-7 countries. These long-horizon regressions yield much more support for UIP -- all the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to the zero coefficient implied by the random walk hypothesis. We then use a small macroeconomic model to explain the differences between the short- and long-horizon results. Regressions run on data generated by stochastic simulations replicate the important regularities in the actual data, including the sharp differences between short- and long-horizon parameters. In the short run from risk premium shocks in the face of endogenous monetary policy. In the long run, in contrast, exchange rate movements are driven by the "fundamentals," leading to a relationship between interest rates and exchange rates that is more consistent with UIP.
Author: Norman C. Miller
Publisher: Edward Elgar Publishing
ISBN: 1781006814
Category : Business & Economics
Languages : en
Pages : 217
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Book Description
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
