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A Yield Curve Perspective on Uncovered Interest Parity

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  • Leo Krippner

    (AMP Capital Investors and University of Waikato)

Abstract

This 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.

Suggested Citation

  • Leo Krippner, 2006. "A Yield Curve Perspective on Uncovered Interest Parity," Working Papers in Economics 06/16, University of Waikato.
    • Handle: RePEc:wai:econwp:06/16
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    File URL: https://repec.its.waikato.ac.nz/wai/econwp/0616.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Anella Munro, 2014. "Exchange rates, expected returns and risk," Reserve Bank of New Zealand Discussion Paper Series DP2014/01, Reserve Bank of New Zealand.
    2. Leo Krippner, 2009. "A theoretical foundation for the Nelson and Siegel class of yield curve models," Reserve Bank of New Zealand Discussion Paper Series DP2009/10, Reserve Bank of New Zealand.
    3. Yu-chin Chen & Kwok Ping Tsang, 2009. "A Macro-Finance Approach to Exchange Rate Determination," Working Papers UWEC-2009-24-R, University of Washington, Department of Economics, revised May 2010.
    4. Leo Krippner, 2010. "Connecting the dots: a yield curve perspective on New Zealand’s interest rates," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 73, September.
    5. Wellmann, Dennis & Trück, Stefan, 2018. "Factors of the term structure of sovereign yield spreads," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 56-75.
    6. Yu-chin Chen & Kwok Ping Tsang, 2009. "A Macro-Finance Approach to Exchange Rate Determination," Working Papers UWEC-2009-24-R, University of Washington, Department of Economics, revised May 2010.

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    More about this item

    Keywords

    uncovered interest parity; forward rate unbiasedness hypothesis; yield curve; term structure of interest rates; ANS model; Nelson and Siegel model;
    All these keywords.

    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

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