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Inflation Expectations and Risk Premiums: Implications for Korean Exchange Rates

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  • Seojin Lee
  • Young Min Kim

Abstract

Nominal yield can be decomposed into real rates, inflation expectations, and inflation risk premia. We estimate an affine term structure model that allows us to decompose nominal bond yields and use the model to study Korea–US exchange rate movements. Our results show that expected inflation and the inflation risk premium have considerable predictive power for Korea–US exchange rates beyond other yield curve factors and macro-variables. In particular, we find that those two nominal factors play a stronger role after 2005. It implies that not only the level of inflation but also inflation uncertainty should be taken into account for predicting Korea–US exchange rates dynamics (JEL classification: E43, F31, G12).

Suggested Citation

  • Seojin Lee & Young Min Kim, 2019. "Inflation Expectations and Risk Premiums: Implications for Korean Exchange Rates," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(9), pages 2072-2085, July.
    • Handle: RePEc:mes:emfitr:v:55:y:2019:i:9:p:2072-2085
    DOI: 10.1080/1540496X.2018.1518217
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    Cited by:

    1. Long, Shaobo & Zhang, Rui & Hao, Jing, 2022. "Asymmetric impact of Sino-US interest rate differentials and economic policy uncertainty ratio on RMB exchange rate," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).

    More about this item

    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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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