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International Yield Curves and Currency Puzzles

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  • Mikhail Chernov
  • Drew D. Creal

Abstract

The currency depreciation rate is often computed as the ratio of foreign to domestic pricing kernels. Using bond prices alone to estimate these kernels leads to currency puzzles: the inability of models to match violations of uncovered interest parity and the volatility of exchange rates. This happens because of the FX bond disconnect, the inability of bonds to span exchange rates. Incorporating innovations to the pricing kernel that affect exchange rates but not bonds helps with resolving the puzzles. This approach also allows one to relate news about the cross-country differences between international yields to news about currency risk premiums.

Suggested Citation

  • Mikhail Chernov & Drew D. Creal, 2018. "International Yield Curves and Currency Puzzles," NBER Working Papers 25206, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25206
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    Cited by:

    1. Eric McCoy, 2020. "Euro-US Dollar Exchange Rate Dynamics at the Effective Lower Bound," European Economy - Economic Briefs 055, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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