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International yield curves and currency puzzles

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  • Chernov, Mikhail
  • Creal, Drew

Abstract

The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices alone to estimate these kernels leads to currency puzzles: the inability of models to match violations of uncovered interest parity and the volatility of exchange rates. That happens because of the FX bond disconnect, the inability of bonds to span exchange rates. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. That approach also allows one to relate the cross-country differences between international yields to currency risk premiums.

Suggested Citation

  • Chernov, Mikhail & Creal, Drew, 2018. "International yield curves and currency puzzles," CEPR Discussion Papers 13252, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13252
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    References listed on IDEAS

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    More about this item

    Keywords

    affine models; bond valuation; Exchange Rates; FX disconnect;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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