On the role of interest rate differentials in the dynamic asymmetry of exchange rates

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NETL
NSTL
Elsevier

外文摘要：© 2023 Elsevier B.V.Motivated by the lack of empirical evidence in favour of the uncovered interest rate parity rule, we revisit the informational content of interest rate differentials (IRD) to explain daily exchange rates variations. Proposing a novel version of a GARCH model, we allow for the IRD to impact on the time-varying conditional asymmetry of the depreciation rate. We find IRD to be a significant factor for the Euro (EUR), the Swiss franc (CHF), the Swedish Krona, the Japanese Yen and the British Pound. These findings empirically support currency crash theories, suggesting that the larger the difference between interest rates, the more likely the high-yield currency appreciates on average but also exhibits greater risk of a large depreciation. Compared to random walk and buy-and-hold benchmarks, we document superior out-of-sample mean returns of a trading rule exploiting IRD information for EUR and CHF.

外文关键词：

Dynamic asymmetryExchange rateGARCHInterest rate differential

作者：

Hambuckers J.、Ulm M.

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作者单位：

University of Liège - HEC Liège

出版年：

2023

DOI：

10.1016/j.econmod.2023.106554

Economic modelling

ISSN：0264-9993

年,卷(期)：2023.129(Dec.)

参考文献量48