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International yield curves and currency puzzles

Mikhail Chernov () and Drew Creal

No 13252, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices alone to estimate these kernels leads to currency puzzles: the inability of models to match violations of uncovered interest parity and the volatility of exchange rates. That happens because of the FX bond disconnect, the inability of bonds to span exchange rates. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. That approach also allows one to relate the cross-country differences between international yields to currency risk premiums.

Keywords: affine models; bond valuation; Exchange Rates; FX disconnect (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon and nep-opm
Date: 2018-10
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