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Continuous-time model of uncovered interest parity with regulated jump-diffusion interest differential

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Author Info
Young-Kyu Moh

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Abstract

This study investigates to what extent can an exchange rate model built on uncovered interest parity (UIP) match the empirical features of the exchange rate and the interest differential data. This article presents a continuous-time model of UIP in which the interest differential evolves following regulated jump-diffusion. Simulation experiments show that the model is capable of matching several important features of the data. Inclusion of jumps improves the model to capture persistent dynamics of interest differential and fat-tails in exchange rate returns compared to simple diffusion processes.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics.

Volume (Year): 38 (2006)
Issue (Month): 21 (December)
Pages: 2523-2533
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Handle: RePEc:taf:applec:v:38:y:2006:i:21:p:2523-2533

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  1. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-27, July. [Downloadable!] (restricted)
  2. Evans, Martin D D & Lewis, Karen K, 1995. "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 709-42. [Downloadable!] (restricted)
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  3. Lee, Bong-Soo & Ingram, Beth Fisher, 1991. "Simulation estimation of time-series models," Journal of Econometrics, Elsevier, vol. 47(2-3), pages 197-205, February. [Downloadable!] (restricted)
  4. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers 02-16, Duke University, Department of Economics. [Downloadable!]
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  5. Peter Schotman & Stefan Straetmans & Casper G. de Vries, 1997. "Big News in Small Samples," Tinbergen Institute Discussion Papers 97-083/2, Tinbergen Institute.
  6. Young-Kyu Moh & Nelson C. Mark, 2004. "Official Interventions and Occasional Violations of Uncovered Interest Parity in the Dollar-DM Market," Econometric Society 2004 Far Eastern Meetings 762, Econometric Society. [Downloadable!]
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  7. Luintel, K. B. & Paudyal, K., 1998. "Common stochastic trends between forward and spot exchange rates," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 279-297, April. [Downloadable!] (restricted)
  8. Corbae, Dean & Lim, Kian-Guan & Ouliaris, Sam, 1992. "On Cointegration and Tests of Forward Market Unbiasedness," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 728-32, November. [Downloadable!] (restricted)
  9. Eric Zivot, 1998. "Cointegration and Forward and Spot Exchange Rate Regressions," Econometrics 9812001, EconWPA. [Downloadable!]
  10. Dumas, Bernard & Peter Jennergren, L. & Naslund, Bertil, 1995. "Realignment risk and currency option pricing in target zones," European Economic Review, Elsevier, vol. 39(8), pages 1523-1544, October. [Downloadable!] (restricted)
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