Long-Run UIP Holds Even in the Short Run

Fabian Ackermann, Walt Pohl () and Karl Schmedders
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Fabian Ackermann: Zurcher Kantonalbank

No 13-31, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The failure of uncovered interest rate parity to explain short-term interest rate movements is well documented. We show that short-term changes in long-term interest rates do help to explain short-term exchange rate movements. The relationship gets stronger over our sample period, as the liquidity of the exchange rate market increases. We also show that controlling for time-varying exchange rate risk also helps to improve the fit of the relationship.

Keywords: currencies; long-term interest rates; uncovered interest parity (search for similar items in EconPapers)
JEL-codes: F31 F37 G15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2013-05
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1331

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