Multihorizon Currency Returns and Purchasing Power Parity

Working Paper No. 24563 Exposures of expected future depreciation rates to the current interest rate differential violate the UIP hypothesis in a distinctive pattern that is a non-monotonic function of horizon. Conversely, forward, risk-adjusted expected depreciation rates are monotonic. We explain...

Full description

Saved in:
Bibliographic Details
Published in:NBER Working Paper Series 2018-04, p.24563
Main Authors: Chernov, Mikhail, Creal, Drew D
Format: Article
Language:English
Subjects:
Arbitrage
Currency
Depreciation rates
Economic conditions
Economic models
Economic theory
Error correction & detection
Foreign exchange rates
Interest rates
Present value
Price levels
Purchasing power parity
Risk premiums
Variables
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Working Paper No. 24563 Exposures of expected future depreciation rates to the current interest rate differential violate the UIP hypothesis in a distinctive pattern that is a non-monotonic function of horizon. Conversely, forward, risk-adjusted expected depreciation rates are monotonic. We explain the two patterns by incorporating the weak form of PPP into a no-arbitrage joint model of the depreciation rate, inflation differential, domestic and foreign yield curves. Short-term departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern.
ISSN:0898-2937
DOI:10.3386/w24563