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Uncovered Interest Rate Parity and the Term Structure

Listed author(s):
  • Geert Bekaert
  • Min Wei
  • Yuhang Xing

This paper examines uncovered interest rate parity (UIRP) and the expectations hypotheses of the term structure (EHTS) at both short and long horizons. The statistical evidence against UIRP is mixed and is currency- not horizon-dependent. Economically, the deviations from UIRP are less pronounced than previously documented. The evidence against the EHTS is statistically more uniform, but, economically, actual spreads and theoretical spreads (spreads constructed under the null of the EHTS) do not behave very differently, especially at long horizons. Partly because of this, the deviations from the EHTS only play a minor role in explaining deviations from UIRP at long horizons. A random walk model for both exchange rates and interest rates fits the data marginally better than the UIRP-EHTS model.

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File URL: http://www.nber.org/papers/w8795.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8795.

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Date of creation: Feb 2002
Publication status: published as Bekaert, Geert & Wei, Min & Xing, Yuhang, 2007. "Uncovered interest rate parity and the term structure," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 1038-1069, October.
Handle: RePEc:nbr:nberwo:8795
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