Geert Bekaert

Uncovered Interest Rate Parity and the Term Structure

Coauthor(s): Min Wei, Yuhang Xing.

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Abstract:

This paper examines uncovered interest rate parity (UIRP) and the expectations hypotheses of the term structure (EHTS) at both short and long horizons. The statistical evidence against UIRP is mixed and is currency- not horizon-dependent. Economically, the deviations from UIRP are less pronounced than previously documented. The evidence against the EHTS is statistically more uniform, but, economically, actual spreads and theoretical spreads (spreads constructed under the null of the EHTS) do not behave very differently, especially at long horizons. Partly because of this, the deviations from the EHTS only play a minor role in explaining deviations from UIRP at long horizons. A random walk model for both exchange rates and interest rates fits the data marginally better than the UIRP-EHTS model.

The PDF above is a preprint version of the article. The final version may be found at < http://dx.doi.org/10.1016/j.jimonfin.2007.05.004 >.

Source: Journal of International Money and Finance
Exact Citation:
Bekaert, Geert, Min Wei, and Yuhang Xing. "Uncovered Interest Rate Parity and the Term Structure." Journal of International Money and Finance 26 (2007): 1038-1069.
Volume: 26
Pages: 1038-1069
Date: 2007