Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
964137 | Journal of International Money and Finance | 2011 | 15 Pages |
Abstract
We use a regime-switching model to examine how exchange rate volatility is related to the failure of uncovered interest parity. Main findings are as follows. First, exchange rate returns are strongly influenced by regime switches in the relationship between the returns and interest rate differentials. Second, low-yielding currencies appreciate less frequently, but once it occurs, their movements are faster than when they depreciate. Third, depreciation of low-yielding currencies and low volatility are mutually dependent on each other. Finally, these three findings are more evident for shorter horizons. The second and third results are consistent with a market participants' view: short-term carry trades in a low-volatility environment and their rapid unwinding substantially influence exchange rates. We consider the effects of funding liquidity to explain these results.
Related Topics
Social Sciences and Humanities
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Economics and Econometrics
Authors
Hibiki Ichiue, Kentaro Koyama,