 On the role of interest rate differentials in the dynamic asymmetry of exchange ratesJ. Hambuckers and M. Ulm Economic Modelling, 2023, vol. 129, issue C Abstract: Motivated by the lack of empirical evidence in favour of the uncovered interest rate parity rule, we revisit the informational content of interest rate differentials (IRD) to explain daily exchange rates variations. Proposing a novel version of a GARCH model, we allow for the IRD to impact on the time-varying conditional asymmetry of the depreciation rate. We find IRD to be a significant factor for the Euro (EUR), the Swiss franc (CHF), the Swedish Krona, the Japanese Yen and the British Pound. These findings empirically support currency crash theories, suggesting that the larger the difference between interest rates, the more likely the high-yield currency appreciates on average but also exhibits greater risk of a large depreciation. Compared to random walk and buy-and-hold benchmarks, we document superior out-of-sample mean returns of a trading rule exploiting IRD information for EUR and CHF. Keywords: Exchange rate; Interest rate differential; GARCH; Dynamic asymmetry (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:129:y:2023:i:c:s0264999323003668 DOI: 10.1016/j.econmod.2023.106554 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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