Uncovered Interest Rate Parity, Carry Trade, and Country Equity Return Differentials

Termkiat Kanchanapoom, Chaiyuth Padungsaksawasdi (), Pornchai Chunhachinda () and Maria E. de Boyrie ()
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Termkiat Kanchanapoom: Department of Finance, Thammasat Business School, Thammasat University, 2 Prachan Road, Bangkok 10200, Thailand
Chaiyuth Padungsaksawasdi: Department of Finance, Thammasat Business School, Thammasat University, 2 Prachan Road, Bangkok 10200, Thailand
Pornchai Chunhachinda: Department of Finance, Thammasat Business School, Thammasat University, 2 Prachan Road, Bangkok 10200, Thailand
Maria E. de Boyrie: Department of Finance, New Mexico State University, MSC 3FIN, College of Business, P.O. BOX 30001, Las Cruces, NM 88003, USA

Global Economy Journal (GEJ), 2018, vol. 18, issue 3, 1-11

Abstract: This paper applies a mixed effect model to investigate the relationship between international equity returns and forward discount sorted currency returns from three base currencies (i. e., US dollar, euro, and pound sterling). Empirical results using the portfolio approach show that high-interest rate currencies co-move positively while low-interest rate currencies co-move negatively, suggesting that foreign equity excess returns can help to explain investment in currency markets, providing a partial resolution to the uncovered interest parity conundrum. Furthermore, we show that global equity market returns, volatility, and liquidity correlate well with currency returns.

Keywords: carry trade; portfolio approach; uncovered interest rate parity; uncovered equity parity; linear mixed effects model (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/GEJ-2018-0041

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