Uncovered Return Parity: Equity Returns and Currency Returns

Edouard Djeutem and Geoffrey Dunbar

Staff Working Papers from Bank of Canada

Abstract: We propose an uncovered expected returns parity (URP) condition for the bilateral spot exchange rate. URP implies that unilateral exchange rate equations are misspecified and that equity returns also affect exchange rates. Fama regressions provide evidence that URP is statistically preferred to uncovered interest rate parity (UIP) for nominal bilateral exchange rates between the US dollar and six countries (Australia, Canada, Japan, Norway, Switzerland and the UK) at the monthly frequency. An implication of URP is that commodity price changes that affect equity returns thus affect bilateral exchange rates through the equity channel. We find evidence that the Australian, Canadian, Norwegian (post 2001) and UK (post 1992) expected exchange rates increase via the oil-equity channel as oil prices rise, whereas the Japanese and Swiss expected exchange rates decrease.

Keywords: Asset pricing; Exchange rates; International financial markets (search for similar items in EconPapers)
JEL-codes: E E4 E43 F F3 F31 G G1 G15 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2018
New Economics Papers: this item is included in nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Uncovered return parity: Equity returns and currency returns (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:18-22

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