Interest Expectations and Exchange Rates News
Brinson Partners; Maastricht University - Department of Finance; PanAgora Asset Management, Inc.
Kees C. G. Koedijk
Tilburg University - Department of Finance
Willem F. C. Verschoor
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Christian C. P. Wolff
University of Luxembourg - Luxembourg School of Finance; Centre for Economic Policy Research (CEPR)
Empirical Economics, Vol. 23, Issue 4, 1998
Using a new survey data set of matched exchange rate and interest rate expectations for eight currencies relative to the German mark, we examine empirically the relationship between exchange rate returns, "news" and risk premia. "News" on interest differentials enters significantly in equations for the difference between the spot rate and the lagged forward rate for the British pound, Japanese yen, Spanish peseta and the U.S. dollar. An unexpected rise in the interest rate differential tends to strengthen the domestic exchange rate. For each of these currencies, we also find significant effects of our ex-ante measure of the risk premium. In addition, we investigate the effect of lagged interest rate differentials as proxy for the risk premium and find that they do not capture time-varying risk premia as is widely suggested in the literature, but probably capture a peso-problem, learning about a policy change, a market-inefficiency or a combination of these factors.
JEL Classification: F31Accepted Paper Series
Date posted: May 18, 1999
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