Deciphering Dollar Exchange Rates and Interest Parity

Yang Yang (), Ren Zhang () and Shuwei Zhang ()
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Yang Yang: School of Finance, Zhongnan University of Economics and Law
Ren Zhang: Department of Finance & Economics, Texas State University
Shuwei Zhang: Department of Economics, Towson University

No 2024-04, Working Papers from Towson University, Department of Economics

Abstract: This paper explores exchange rate dynamics and the uncovered interest parity (UIP) violation in the context of multiple shocks. Our key contribution lies in reveal- ing that exchange rate dynamics emanate from the collective influence of different shocks, in contrast to prevailing literature emphasizing the dominance of a single shock. While verifying the unconditional UIP reversals, we are the ï¬ rst to show that there is no signiï¬ cant evidence of conditional UIP reversal with an innovative test method developed in this paper. Additionally, through rigorous mathematical proof, we establish that conditional UIP reversal is not a prerequisite for unconditional UIP reversal in models featuring a moving averaging representation. This insight relaxes stringent prerequisites in earlier theoretical studies, offering broad applicability for understanding reversal patterns in UIP and other asset returns.

Keywords: Bayesian SVAR; Exchange rate; New Fama puzzle; Uncovered interest parity. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 F31 F41 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2024-03, Revised 2024-03
New Economics Papers: this item is included in nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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