Uncovered return parity: Equity returns and currency returns

Edouard Djeutem and Geoffrey Dunbar

Journal of International Money and Finance, 2022, vol. 128, issue C

Abstract: We propose an uncovered expected returns parity (URP) condition for the bilateral spot exchange rate that results from free entry into international finance by global financiers. Under URP, bilateral spot exchange rates are realizations of two underlying parity conditions that depend, in part, on the expected returns of risky assets available to financiers. We estimate finite mixture model regressions for six currencies against the US dollar (Australia, Canada, Japan, Norway, Switzerland and the UK) and show that expected excess equity returns are a statistically significant determinant of exchange rate dynamics. We subject our results to numerous robustness exercises and find consistent evidence of the importance of expected excess equity returns for exchange rate dynamics.

Keywords: Exchange Rates; Equity Returns; Interest Rate Parity (search for similar items in EconPapers)
JEL-codes: E43 F31 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560622001097
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Uncovered Return Parity: Equity Returns and Currency Returns (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:eee:jimfin:v:128:y:2022:i:c:s0261560622001097

DOI: 10.1016/j.jimonfin.2022.102706

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().