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Exchange-Rate Expectations and Nominal Interest Differentials: A Test ofthe Fisher Hypothesis

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Robert E. Cumby
Maurice Obstfeld

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Abstract

This note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period. This proposition, often called the "Fisher open" hypothesis or the hypothesis of perfect asset substitutability, has been a major component of recent theories of exchange-rate determination, and has important implications for monetary policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0537.

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Date of creation: Nov 1981
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Handle: RePEc:nbr:nberwo:0537

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  1. Grauer, Frederick L. A. & Litzenberger, Robert H. & Stehle, Richard E., 1976. "Sharing rules and equilibrium in an international capital market under uncertainty," Journal of Financial Economics, Elsevier, vol. 3(3), pages 233-256, June. [Downloadable!] (restricted)
  2. Upson, Roger B., 1972. "Random Walk and Forward Exchange Rates: A Spectral Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(04), pages 1897-1905, September. [Downloadable!]
  3. Richard A. Meese & Kenneth J. Singleton, 1980. "Rational expectations, risk premia, and the market for spot and forward exchange," International Finance Discussion Papers 165, Board of Governors of the Federal Reserve System (U.S.).
  4. Frank McCormick, 1979. "Covered-interest arbitrage: unexploited profits: comment," International Finance Discussion Papers 132, Board of Governors of the Federal Reserve System (U.S.).
  5. McCormick, Frank, 1979. "Covered Interest Arbitrage: Unexploited Profits? Comment," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 411-17, April. [Downloadable!] (restricted)
  6. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October. [Downloadable!] (restricted)
  7. Burt, John & Kaen, Fred R & Booth, G Geoffrey, 1977. "Foreign Exchange Market Efficiency under Flexible Exchange Rates," Journal of Finance, American Finance Association, vol. 32(4), pages 1325-30, September. [Downloadable!] (restricted)
  8. Cornell, Bradford, 1977. "Spot rates, forward rates and exchange market efficiency," Journal of Financial Economics, Elsevier, vol. 5(1), pages 55-65, August. [Downloadable!] (restricted)
  9. Frankel, Jeffrey A., 1979. "The diversifiability of exchange risk," Journal of International Economics, Elsevier, vol. 9(3), pages 379-393, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Arusha Cooray, 2003. "Financial integration: some evidence from Australia," Applied Economics Letters, Taylor and Francis Journals, vol. 10(15), pages 959-966, December. [Downloadable!] (restricted)
  2. Richard K. Lyons, 1986. "Tests of the foreign exchange risk premium using the expected second moments implied by option pricing," International Finance Discussion Papers 290, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Das Gupta, Dipak & Das Gupta, Bejoy & DEC, 1994. "Interest rates in open economies : real interest rate parity, exchange rates, and country risk in industrial and developing countries," Policy Research Working Paper Series 1283, The World Bank. [Downloadable!]
  4. Kenneth A. Froot & Jeffrey A. Frankel, 1989. "Interpreting Tests of Forward Discount Bias Using Survey Data on Exchange Rate Expectations," NBER Working Papers 1963, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Qian, Ying & Varangis, Panos, 1992. "Does exchange rate volatility hinder export growth? Additional evidence," Policy Research Working Paper Series 911, The World Bank. [Downloadable!]
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