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International Yield Curves and Currency Puzzles

Mikhail Chernov () and Drew Creal

No 25206, NBER Working Papers from National Bureau of Economic Research, Inc

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. One cannot use information in bonds alone because exchange rates are not spanned by bonds. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. It also allows us to connect the differences between international yield curves to characteristics of exchange rates.

JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
Date: 2018-11
Note: AP IFM
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