A Yield Curve Perspective on Uncovered Interest Parity

Leo Krippner

Working Papers in Economics from University of Waikato

Abstract: This article uses a dynamic multi-factor model of the yield curve with a rational-expectations, general-equilibrium-economy foundation to investigate the uncovered interest parity hypothesis(UIPH). The yield curve model is used to decompose the interest rate data used in the UIPH regressions into components that reflect rationally-based expectations of the cyclical and fundamental components of the underlying economy. The UIPH is not rejected based on the fundamental components of interest rates, but is soundly rejected based on the cyclical components. These results provide empirical support for suggestions in the existing theoretical literature that rationally-based interest rate and exchange rate dynamics associated with cyclical inter-linkages between the economy and financial markets may contribute materially to the UIPH puzzle.

Keywords: uncovered interest parity; forward rate unbiasedness hypothesis; yield curve; term structure of interest rates; ANS model; Nelson and Siegel model (search for similar items in EconPapers)
JEL-codes: E43 F31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-12-21
New Economics Papers: this item is included in nep-fmk, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:wai:econwp:06/16

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