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Uncovered Interest Rate Parity, Carry Trade, and Country Equity Return Differentials

Author

Listed:
  • Kanchanapoom Termkiat
  • Padungsaksawasdi Chaiyuth
  • Chunhachinda Pornchai

    (Department of Finance, Thammasat Business School, Thammasat University, 2 Prachan Road,Bangkok 10200, Thailand)

  • de Boyrie Maria E.

    (Department of Finance, New Mexico State University, MSC 3FIN, College of Business, P.O. BOX 30001, Las Cruces, NM 88003, USA)

Abstract

This paper applies a mixed effect model to investigate the relationship between international equity returns and forward discount sorted currency returns from three base currencies (i. e., US dollar, euro, and pound sterling). Empirical results using the portfolio approach show that high-interest rate currencies co-move positively while low-interest rate currencies co-move negatively, suggesting that foreign equity excess returns can help to explain investment in currency markets, providing a partial resolution to the uncovered interest parity conundrum. Furthermore, we show that global equity market returns, volatility, and liquidity correlate well with currency returns.

Suggested Citation

  • Kanchanapoom Termkiat & Padungsaksawasdi Chaiyuth & Chunhachinda Pornchai & de Boyrie Maria E., 2018. "Uncovered Interest Rate Parity, Carry Trade, and Country Equity Return Differentials," Global Economy Journal, De Gruyter, vol. 18(3), pages 1-11, September.
    • Handle: RePEc:bpj:glecon:v:18:y:2018:i:3:p:11:n:5
    DOI: 10.1515/gej-2018-0041
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    More about this item

    Keywords

    carry trade; portfolio approach; uncovered interest rate parity; uncovered equity parity; linear mixed effects model;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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