International yield curves and currency puzzles

Mikhail Chernov and Drew Creal

No 13252, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Exchange rates; Bond valuation; Fx disconnect; Affine models (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP13252 (application/pdf)

Related works:
Journal Article: International Yield Curves and Currency Puzzles (2023)
Working Paper: International Yield Curves and Currency Puzzles (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13252

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13252

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().