English, Article, Journal or magazine article edition: Uncovering Yield Parity: A New Insight into the UIP Puzzle through the Stationarity of Long Maturity Forward Rates Gábor Rappai; Zoltán Schepp; Zsolt Darvas; ...

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Bookmark: http://trove.nla.gov.au/version/34658
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Uncovering Yield Parity: A new insight into the UIP puzzle through the stationarity of long maturity forward rates
Author
  • Gábor Rappai
  • Zoltán Schepp
  • Zsolt Darvas
  • Gábor Rappai
  • Zoltán Schepp
Physical Description
  • preprint
Notes
  • RePEc:mmf:mmfc06:84
  • Results and models of this paper are based on a strikingly new empirical observation: long maturity forward rates between bilateral currency pairs of the US, Germany, UK, and Switzerland are stationary. Based on this result, we suggest a new explanation for the UIP-puzzle maintaining rational expectations and risk neutrality. The model builds on the interaction of foreign exchange and fixed income markets. Ex ante short run and long run UIP and the EHTS is assumed. We show that ex post shocks to the term structure could explain the behavior of the nominal exchange rate including its volatility and the failure of ex post short UIP regressions. We present evidence on ex post validity of long run UIP and strikingly new evidence on the stationarity of the long forward exchange rates of major currencies. We set up, calibrate and simulate a stylized model that well captures the observed properties of spot exchange rates and UIP regressions of major currencies. We define the notion of yield parity and test its empirical performance for monthly series of major currencies with favorable results.
  • EHTS; forward discount bias; stationarity of long maturity forward rates; UIP; yield parity
  • RePEc:dnb:dnbwpp:098
Language
  • English
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