Nominal Exchange Rates and Nominal Interest Rate Differentials

Simone, Francisco d Nadal De; Razzak, Weshah

doi:10.5089/9781451856163.001

Cited by 9 publications

(4 citation statements)

References 27 publications

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“…As for the horizon of the rates used to test the unbiasedness hypothesis, finds support for the unbiasedness hypothesis when one-year forward exchange rates are used instead of one-month contracts. His finding is consistent with the literature on uncovered interest rate parity, for which some authors also find support when using long-term interest rates (e.g., Chinn & Meredith, 2004;Nadal De Simone & Razzak, 1999). Next, we collect dummies for the frequencies of data as follows: daily (12.3%), weekly (13%), monthly (72%), quarterly (2.4%), and other frequency (0.2%).…”

Section: Variablessupporting

confidence: 84%

“…Similarly, if longer horizon rates are used to test the forward unbiasedness hypothesis the reported coefficients are larger by around 1.2 (the coefficient equals 0.2, but note that the variable is used in logs). In a similar vein, Nadal De Simone & Razzak (1999) find that long-term interest rates can explain a larger portion of the spot exchange rate movements. Furthermore, larger sample sizes also yield larger estimates of β by about 0.8 (again, the coefficient itself is −0.2, but the variable is used in logs).…”

Section: Resultsmentioning

confidence: 75%

“…Nevertheless, no such support for the hypothesis emerges when other currencies are used for measuring exchange rates. In a similar vein, studies by Mussa (1979), Chinn & Meredith (2004), and Nadal De Simone & Razzak (1999) corroborate that long-term rates are more suitable for explaining the movements of spot exchange rates in tests of forward rate unbiasedness.…”

Section: Testing Forward Rate Unbiasednessmentioning

confidence: 74%

See 2 more Smart Citations

How puzzling is the forward premium puzzle? A meta-analysis

Žigraiová

Havránek

Iršová

et al. 2021

European Economic Review

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A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates, which is inconsistent with the forward rate unbiasedness hypothesis. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases we estimate the slope coefficients of 0.31 and 0.98 for developed and emerging currencies respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currencies, and estimation methods.

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Section: Variablessupporting

confidence: 84%

Section: Resultsmentioning

confidence: 75%

Section: Testing Forward Rate Unbiasednessmentioning

confidence: 74%

See 1 more Smart Citation

How puzzling is the forward premium puzzle? A meta-analysis

Žigraiová

Havránek

Iršová

et al. 2021

European Economic Review

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show abstract

“…2) Recently, there have appeared empirical papers that address the uncovered exchange rate parity for the long term bond yields directly (see e.g. Nadal-de-Simone andRazzak, 1999, or Berk andKnot, 2001).…”

Section: Introductionmentioning

confidence: 99%

The uncovered parity properties of the czech koruna

Derviz¹

2002

Prague Economic Papers

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The paper studies the compliance of the CZK -EUR exchange rate with the uncovered parity of returns on assets denominated in the two named currencies. A comparison with the same property for the euro-dollar rate is made. An uncovered total return parity (UTRP) formula is derived from the equilibrium in a portfolio optimization model with liquidity constraints. It is shown that the uncovered parity of total returns, and not of short-term money market rates, is a natural outcome of stochastic equilibrium asset pricing models that generalize the International Consumption-based Capital Asset Pricing Model. Accordingly, the traditional uncovered interest rate parity should be replaced by UTRP in empirical analysis. UTRP tests for the CZK/EUR and the USD/EMU currency pairs are conducted using yields of long-term government bond yields. UTRP typically holds, although the time horizons and measures of exchange rate movements, for which it becomes visible, may vary.

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The forward rate unbiasedness hypothesis revisited

Razzak

2002

Int. J Fin Econ

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It is widely accepted that long-term interest rates are more suitable for testing the Uncovered Interest Rate Parity (UIP) than shorter-term rates. This paper shows that while using longer-term (1-year) forward exchange rates are also more suitable than shorter-term rates (1-month) for testing the forward exchange rate unbiasedness hypothesis (FRUH) the test is sensitive to the choice of the numeraire currency, i.e. the US dollar, the Deutsche mark (DM) or the Japanese yen. The FRUH holds in currencies measured in terms of the US dollar when a one-year forward contract is used instead of a one-month contract, but it does not hold when the DM and the yen are used as numeraire currencies.

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Nominal Exchange Rates and Nominal Interest Rate Differentials

Cited by 9 publications

References 27 publications

How puzzling is the forward premium puzzle? A meta-analysis

How puzzling is the forward premium puzzle? A meta-analysis

The uncovered parity properties of the czech koruna

The forward rate unbiasedness hypothesis revisited

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