International Yield Curves and Currency Puzzles

50 Pages Posted: 22 Oct 2018 Last revised: 14 Jan 2019

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: October 2018

Abstract

The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices alone to estimate these kernels leads to currency puzzles: the inability of models to match violations of uncovered interest parity and the volatility of exchange rates. That happens because of the FX bond disconnect, the inability of bonds to span exchange rates. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. That approach also allows one to relate the cross-country differences between international yields to currency risk premiums.

Keywords: affine models, bond valuation, Exchange Rates, FX disconnect

JEL Classification: F31, G12, G15

Suggested Citation

Chernov, Mikhail and Creal, Drew, International Yield Curves and Currency Puzzles (October 2018). CEPR Discussion Paper No. DP13252. Available at SSRN: https://ssrn.com/abstract=3270929

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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