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

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  • Young-Kyu Moh

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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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840500427809
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 38 (2006)
Issue (Month): 21 ()
Pages: 2523-2533

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Handle: RePEc:taf:applec:v:38:y:2006:i:21:p:2523-2533

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