Multihorizon Currency Returns and Purchasing Power Parity

63 Pages Posted: 1 May 2018 Last revised: 22 Oct 2018

See all articles by Mikhail Chernov

Mikhail Chernov

UCLA Anderson

Drew Creal

University of Chicago - Booth School of Business - Econometrics and Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2018

Abstract

Exposures of expected future depreciation rates to the current interest rate differential violate the UIP hypothesis in a distinctive pattern that is a non-monotonic function of horizon. Conversely, forward, risk-adjusted expected depreciation rates are monotonic. We explain the two patterns by incorporating the weak form of PPP into a no-arbitrage joint model of the depreciation rate, inflation differential, domestic and foreign yield curves. Short-term departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern.

Keywords: affine term structure model, cointegration, multiple horizons, purchasing power parity, uncovered interest parity

JEL Classification: F31, F47, G12, G15

Suggested Citation

Chernov, Mikhail and Creal, Drew, Multihorizon Currency Returns and Purchasing Power Parity (April 2018). CEPR Discussion Paper No. DP12893. Available at SSRN: https://ssrn.com/abstract=3171161

Mikhail Chernov (Contact Author)

UCLA Anderson ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Drew Creal

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States

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