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

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  • Nelson Mark
  • Young-Kyu Moh

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9948.

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Date of creation: Sep 2003
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Publication status: published as Mark, Nelson and Y.K. Moh. “Official Interventions and Occasional Violations of Uncovered Interest Parity in the Dollar-DM Market." Journal of Empirical Finance 14 (September 2007): 499-522.
Handle: RePEc:nbr:nberwo:9948

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Cited by:
  1. Arusha Cooray, 2009. "Is the adjustment to real interest rate parity asymmetric?," Empirica, Springer, Springer, vol. 36(4), pages 407-418, November.
  2. Lee, Byung-Joo, 2007. "Uncovered Interest Parity: Cross-sectional Evidence," MPRA Paper 10360, University Library of Munich, Germany.
  3. Jaehun Chung & Yongmiao Hong, 2007. "Model-free evaluation of directional predictability in foreign exchange markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 22(5), pages 855-889.
  4. Young-Kyu Moh, 2006. "Continuous-time model of uncovered interest parity with regulated jump-diffusion interest differential," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(21), pages 2523-2533.
  5. Derek Bond & Michael J. Harrison & Niall Hession & Edward J. O'Brien, 2006. "Some Empirical Observations on the Forward Exchange Rate Anomaly," Trinity Economics Papers, Trinity College Dublin, Department of Economics tep2006, Trinity College Dublin, Department of Economics.
  6. repec:wyi:journl:002068 is not listed on IDEAS
  7. Lee, Byung-Joo, 2013. "Uncovered interest parity puzzle: Asymmetric responses," International Review of Economics & Finance, Elsevier, Elsevier, vol. 27(C), pages 238-249.

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