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      A yield curve perspective on uncovered interest parity

      Krippner, Leo
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      Economics_wp_0616.pdf
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      Krippner, L. (2006). A yield curve perspective on uncovered interest parity. (Department of Economics Working Paper Series, Number 16/06). Hamilton, New Zealand: University of Waikato.
      Permanent Research Commons link: https://hdl.handle.net/10289/1625
      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.
      Date
      2006-12
      Type
      Working Paper
      Series
      Department of Economics Working Paper Series
      Report No.
      16/06
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      • Management Papers [1125]
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