The uncovered parity properties of the czech koruna

Alexis Derviz ()

Prague Economic Papers, 2002, vol. 2002, issue 1, 17-37

Abstract: The paper studies the compliance of the CZK - EUR exchange rate with the uncovered parity of returns on assets denominated in the two named currencies. A comparison with the same property for the euro-dollar rate is made. An uncovered total return parity (UTRP) formula is derived from the equilibrium in a portfolio optimization model with liquidity constraints. It is shown that the uncovered parity of total returns, and not of short-term money market rates, is a natural outcome of stochastic equilibrium asset pricing models that generalize the International Consumption-based Capital Asset Pricing Model. Accordingly, the traditional uncovered interest rate parity should be replaced by UTRP in empirical analysis. UTRP tests for the CZK/EUR and the USD/EMU currency pairs are conducted using yields of long-term government bond yields. UTRP typically holds, although the time horizons and measures of exchange rate movements, for which it becomes visible, may vary.

Keywords: uncovered parity; asset prices; portfolio optimization; international consumption-based capital asset pricing model (search for similar items in EconPapers)
JEL-codes: C61 E44 F31 F41 G11 G12 (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.18267/j.pep.186

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