Long-Run UIP Holds Even in the Short Run

27 Pages Posted: 30 May 2013 Last revised: 1 Jul 2013

See all articles by Fabian Ackermann

Fabian Ackermann

Zurcher Kantonalbank

Walt Pohl

NHH Norwegian School of Economics; University of Zurich

Karl Schmedders

IMD Lausanne

Date Written: May 28, 2013


The failure of uncovered interest rate parity to explain short-term interest rate movements is well documented. We show that short-term changes in long-term interest rates do help to explain short-term exchange rate movements. The relationship gets stronger over our sample period, as the liquidity of the exchange rate market increases. We also show that controlling for time-varying exchange rate risk also helps to improve the fit of the relationship.

Keywords: currencies, long-term interest rates, uncovered interest parity

JEL Classification: F31, F37, G15

Suggested Citation

Ackermann, Fabian and Pohl, Walt and Pohl, Walt and Schmedders, Karl, Long-Run UIP Holds Even in the Short Run (May 28, 2013). Swiss Finance Institute Research Paper No. 13-31, Available at SSRN: https://ssrn.com/abstract=2272088 or http://dx.doi.org/10.2139/ssrn.2272088

Fabian Ackermann

Zurcher Kantonalbank ( email )

8010 Zurich, 8010

Walt Pohl

NHH Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen

University of Zurich ( email )

Moussonstrasse 15
Zürich, 8044

Karl Schmedders (Contact Author)

IMD Lausanne ( email )

Lausanne, CH-1003
+41 (0)79 596 8956 (Phone)

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