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Official Interventions and Occasional Violations of Uncovered Interest Parity in the Dollar-DM Market

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  • Young-Kyu Moh
  • Nelson C. Mark

Abstract

This paper presents a model of exchange rate determination in which the forward premium anomaly emerges as the result of unanticipated central bank interventions in the foreign exchange market. Deviations from uncovered interest parity (UIP) therefore represent neither unexploited profit opportunities nor compensation for bearing risk. In simulations, the model generates a forward premium anomaly and matches several other notable features of US-German data. Additional empirical support is obtained from an analysis of Fed and Bundesbank interventions in the dollar—DM market where it is found that the forward premium anomaly intensifies during those times when a central bank intervenes

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 762.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:762

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Keywords: Forward premium anomaly; foreign exchange intervention;

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References

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Citations

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Cited by:
  1. Bond, Derek & Harrison, Michael J & Hession, Niall & O’Brien, Edward J., 2006. "Some Empirical Observations on the Forward Exchange Rate Anomaly," Research Technical Papers 3/RT/06, Central Bank of Ireland.
  2. Byung‐Joo Lee, 2011. "Uncovered Interest Parity: Cross‐Sectional Evidence," Review of International Economics, Wiley Blackwell, vol. 19(2), pages 219-231, 05.
  3. repec:wyi:journl:002068 is not listed on IDEAS
  4. Lee, Byung-Joo, 2013. "Uncovered interest parity puzzle: Asymmetric responses," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 238-249.
  5. Young-Kyu Moh, 2006. "Continuous-time model of uncovered interest parity with regulated jump-diffusion interest differential," Applied Economics, Taylor & Francis Journals, vol. 38(21), pages 2523-2533.
  6. Jaehun Chung & Yongmiao Hong, 2007. "Model-free evaluation of directional predictability in foreign exchange markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(5), pages 855-889.
  7. Arusha Cooray, 2009. "Is the adjustment to real interest rate parity asymmetric?," Empirica, Springer, vol. 36(4), pages 407-418, November.

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