A Yield Curve Perspective on Uncovered Interest Parity
AbstractThis article uses a dynamic multi-factor model of the yield curve with a rational-expectations, general-equilibrium-economy foundation to investigate the uncovered interest parity hypothesis(UIPH). The yield curve model is used to decompose the interest rate data used in the UIPH regressions into components that reflect rationally-based expectations of the cyclical and fundamental components of the underlying economy. The UIPH is not rejected based on the fundamental components of interest rates, but is soundly rejected based on the cyclical components. These results provide empirical support for suggestions in the existing theoretical literature that rationally-based interest rate and exchange rate dynamics associated with cyclical inter-linkages between the economy and financial markets may contribute materially to the UIPH puzzle.
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Bibliographic InfoPaper provided by University of Waikato, Department of Economics in its series Working Papers in Economics with number 06/16.
Length: 31 pages
Date of creation: 21 Dec 2006
Date of revision:
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More information through EDIRC
uncovered interest parity; forward rate unbiasedness hypothesis; yield curve; term structure of interest rates; ANS model; Nelson and Siegel model;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-10 (All new papers)
- NEP-FMK-2007-02-10 (Financial Markets)
- NEP-IFN-2007-02-10 (International Finance)
- NEP-MAC-2007-02-10 (Macroeconomics)
- NEP-MON-2007-02-10 (Monetary Economics)
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