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Long-Run UIP Holds Even in the Short Run

Author

Listed:
  • Fabian Ackermann

    (Zurcher Kantonalbank)

  • Walt Pohl

    (NHH Norwegian School of Economics; University of Zurich)

  • Karl Schmedders

    (University of Zurich)

Abstract

The failure of uncovered interest rate parity to explain short-term interest rate movements is well documented. We show that short-term changes in long-term interest rates do help to explain short-term exchange rate movements. The relationship gets stronger over our sample period, as the liquidity of the exchange rate market increases. We also show that controlling for time-varying exchange rate risk also helps to improve the fit of the relationship.

Suggested Citation

  • Fabian Ackermann & Walt Pohl & Karl Schmedders, 2013. "Long-Run UIP Holds Even in the Short Run," Swiss Finance Institute Research Paper Series 13-31, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1331
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2272088
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    More about this item

    Keywords

    currencies; long-term interest rates; uncovered interest parity;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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