Not according to our data. We use two data sets to test whether professional forecasters follow uncovered interest rate parity (UIP) when making their exchange rate predictions both based on point prediction and direction. We find that professional forecasters generally do not follow UIP across...

This paper investigates the sensitivity of the demand for safe government debt to currency unhedged and hedged excess returns in a sample of US mutual funds. We find evidence of active rebalancing towards government bonds that offer relatively higher returns on an unhedged basis, in particular...

The finding of Feldstein and Horioka (1980) that domestic saving and domestic investment are highly correlated across countries despite the rapid globalization and liberalization of financial markets in recent decades has been regarded as a Puzzle or Paradox. However, in this paper, we show that...

We provide a systematic empirical treatment of short-term Covered Interest Parity (CIP) deviations for a large set of emerging market (EM) currencies. EM CIP deviations have much larger volatilities than most G10 currencies and move in an opposite direction during global risk-off episodes. While...

This paper applies novel time-varying Granger causality tests to the Uncovered Interest Rate Parity (UIP) relation for G10 currencies. In line with UIP, our findings indicate that long term interest rates Granger-cause exchange rates around periods of major macroeconomic and (geo)political events

Historically, currency swap lines between central banks were used to provide liquidity assistance to countries and as a means to influence exchange rates and offshore money market interest rates, such as the London interbank offered rate (LIBOR). Allen, Galati, Moessner, and Nelson (2017)...

This paper investigates purchasing power parity (PPP) between the G7 member countries after the advent of the Euro currency. A dynamic joint model of PPP and uncovered interest parity (UIP) is introduced to decompose the real exchange rate (RER) into two components. Interest rate differential...

This paper documents a novel result regarding the uncovered interest rate parity (UIP) puzzle: investing in high interest rate currencies does not yield positive excess returns during recessions. That is, the UIP holds in bad times. This new finding is a challenge to existing rational...

In the 4×4 Asset Allocation framework all assets and liabilities in any portfolio should be thought of as means contributing to the following four ends:• Liquidity maintenance: nominally safe and quickly accessible “cash-like” pool of assets,• Income generation: relatively regular,...

The standard uncovered interest parity (UIP)—a logarithm version—is inappropriate for currencies with a high interest rate because the interest rate (i) does not satisfy the ln(1 + i) = i condition. Therefore, this study employs the precise form of UIP and evaluates its empirical validity...

We examine the causal relationship between US monetary policy shocks, exchange rates and currency excess returns for a sample of eight advanced countries over the period 1980M1 to 2022M11. We find that the dynamics of the US dollar exchange rate is the main driver of currency excess returns. The...

Interest rate parity (IRP) states that the difference between the interest rates of two currencies equals the expected percentage change in the associated exchange rate. Unfortunately, IRP is ambiguous. There are two inconsistent values of the expected percentage change in the exchange rate,...

In this paper, I analyze covered interest rate parity (CIP) deviations among thirteen (13) Emerging Market economies and the US dollar. Also, I document a new triangular connection formed by the US dollar, oil prices in US dollars, and CIP deviations. I find empirical evidence that a stronger...

Using confidential daily foreign exchange interventions (FXI) data, we analyse the FXI episode of the Bank of Israel (BOI) from 2013 to 2019. We find that a purchase of US dollar (USD) 1 billion is on average associated with a depreciation of the Israeli new shekel (ILS) by 0.82%-0.83%, which is...

Interest rate parity (IRP) states that the difference between the interest rates of two currencies equals the expected percentage change in the associated exchange rate. Unfortunately, IRP is ambiguous. There are two inconsistent values of the expected percentage change in the exchange rate,...

This paper studies the effect of exchange rate uncertainty on the deviations of Covered Interest Rate parity. I develop a method for estimating the daily uncertainty via endogenous factor clustering to determine the currency grouping and an optimal number of groups and general factors explaining...

We revisit the "puzzle" in open economy studies that evidence of international risk-sharing is hardly seen despite the completeness of the financial market. We reassess both risk-pooling via state-contingent bonds, and uncovered interest parity - both were believed to be different, and...

No, not according to our data. Using a unique data set, we run panel regressions to test whether professional forecasters believe in uncovered interest rate parity (UIP). Specifically, we test whether the interest rate expectations for individual forecasters are in line with their exchange rate...

This paper investigates whether the uncovered interest parity (UIP) will hold more firmly if the local currency bond markets (LCBMs) are more developed, and the presence of nonbank financial institutions (NBFIs) is expanded. Deviations in UIP decrease as LCBMs develop, while the patterns of the...

We provide a systematic empirical treatment of short-term Covered Interest Parity (CIP) deviations for a large set of emerging market (EM) currencies. EM CIP deviations have much larger volatilities than most G10 currencies and move in an opposite direction during global risk-off episodes. While...

This paper investigates whether the uncovered interest parity (UIP) will hold more firmly if the local currency bond markets (LCBMs) are more developed, and the presence of nonbank financial institutions (NBFIs) is expanded. Deviations in UIP decrease as LCBMs develop, while the patterns of the...

We review the literature on multi-horizon currency risk premiums. We show how the multi-horizon implications arise from the classic present-value relationship. We further show how these implications manifest themselves in the interaction between bond and currency risk premiums. This link is...

Suppose a rational agent can invest in domestic bonds (Euro (EUR) corporates) and foreign bonds (Dollar (USD) corporates) hedged into EUR using cross-currency swaps. Let xccy represent the cross-currency basis spread of the FX hedging, where xccy measures deviations from covered interest parity...

The purpose of this study is demonstrating why entrepreneurs should monitor the broad dollar index. This paper explains the reason why the broad dollar index has become a risk (leverage) gauge since 2008 using the Covered Interest Parity (CIP). CIP can be viewed as a reflection of the shadow...

We study domestic and international drivers of long-term interest rates using newly compiled financial market data for Switzerland starting in 1852. We use a time-varying parameter vector autoregressive model to estimate long-term trends in nominal interest rates, exchange rate growth, and...