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Interest expectations and exchange rates news

Author

Listed:
  • Stefano Cavaglia

    (Pan Agora Asset Management, Boston, USA)

  • Willem F. C. Verschoor

    (National Investment Bank, The Hague, The Netherlands)

  • Christian C. P. Wolff

    (Limburg Institute of Financial Economics , Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands)

  • Kees G. Koedijk

    (Limburg Institute of Financial Economics , Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands)

Abstract

Using a new survey data set of matched exchange rate and interest rate expectations for eight currencies relative to the German mark, we examine empirically the relationship between exchange rate returns, `news' and risk premia. "News" on interest differentials enters significantly in equations for the difference between the spot rate and the lagged forward rate for the British pound, Japanese yen, Spanish peseta and the US dollar. An unexpected rise in the interest rate differential tends to strengthen the domestic exchange rate. For each of these currencies, we also find significant effects of our ex-ante measure of the risk premium. In addition, we investigate the effect of lagged interest rate differentials as proxy for the risk premium and find that they do not capture time-varying risk premia as is widely suggested in the literature, but probably capture a peso-problem, learning about a policy change, a market-inefficiency or a combination of these factors.

Suggested Citation

  • Stefano Cavaglia & Willem F. C. Verschoor & Christian C. P. Wolff & Kees G. Koedijk, 1998. "Interest expectations and exchange rates news," Empirical Economics, Springer, vol. 23(4), pages 525-534.
    • Handle: RePEc:spr:empeco:v:23:y:1998:i:4:p:525-534
    Note: received: June 1996/final version received: February 1997
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    Citations

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    Cited by:

    1. Carlos Eduardo Iwai Drumond & Gilberto Tadeu Lim, 2014. "Exchange Rate Dynamics With Heterogeneous Expectations," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41st Brazilian Economics Meeting] 108, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    2. Verschoor, Willem F. C. & Wolff, Christian C. P., 2001. "Scandinavian forward discount bias risk premia," Economics Letters, Elsevier, vol. 73(1), pages 65-72, October.
    3. Zsolt Darvas & Gábor Rappai & Zoltán Schepp, 2006. "Uncovering Yield Parity: A new insight into the UIP puzzle through the stationarity of long maturity forward rates," DNB Working Papers 098, Netherlands Central Bank, Research Department.
    4. Schepp, Zoltán, 2003. "Befektetői horizont és a „forwardrejtély” [The investor horizon and the ‘forward puzzle’]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 939-963.

    More about this item

    Keywords

    Exchange rates · risk premia · survey data;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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