International Yield Curves and Currency Puzzles

48 Pages Posted: 5 Nov 2018

See all articles by Mikhail Chernov

Mikhail Chernov

UCLA Anderson

Drew Creal

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

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Date Written: November 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. One cannot use information in bonds alone because exchange rates are not spanned by bonds. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. It also allows us to connect the differences between international yield curves to characteristics of exchange rates.

Suggested Citation

Chernov, Mikhail and Creal, Drew, International Yield Curves and Currency Puzzles (November 2018). NBER Working Paper No. w25206, Available at SSRN: https://ssrn.com/abstract=3278506

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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