A Theory of Exchange Rates and the Term Structure of Interest Rates

Hyoung-Seok Lim () and Masao Ogaki
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Hyoung-Seok Lim: The Ohio State University.

No 504, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

Abstract: The purpose of this paper is to construct a model of exchange rate determination that is consistent with the stylized facts regarding the uncovered interest parity for short term and long term interest rates. This task is especially challenging because of the forward premium anomaly found for short term interest rates and forward exchange rates. With an assumption that investors have a short investment horizon, the model is consistent with these stylized facts even when the degree of risk aversion is low. The model predicts a complicated relationship between exchange rates and the term structure of the interest rates.

Keywords: forward premium anomaly; uncovered interest parity for long term bonds (search for similar items in EconPapers)
JEL-codes: F31 G11 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2003-11
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: A Theory of Exchange Rates and the Term Structure of Interest Rates (2013)
Working Paper: A Theory of Exchange Rates and the Term Structure of Interest Rates (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:roc:rocher:504

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