Multihorizon Currency Returns and Purchasing Power Parity

Mikhail Chernov and Drew Creal

No 12893, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Exposures of expected future depreciation rates to the current interest rate differential violate the UIP hypothesis in a distinctive pattern that is a non-monotonic function of horizon. Conversely, forward, risk-adjusted expected depreciation rates are monotonic. We explain the two patterns by incorporating the weak form of PPP into a no-arbitrage joint model of the depreciation rate, inflation differential, domestic and foreign yield curves. Short-term departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern.

Keywords: Uncovered interest parity; Purchasing power parity; Cointegration; Multiple horizons; Affine term structure model (search for similar items in EconPapers)
JEL-codes: F31 F47 G12 G15 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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