TY - JOUR
T1 - What does the yield curve tell us about exchange rate predictability?
AU - Chen, Yu-Chin
AU - Tsang, Kwok Ping
PY - 2013
Y1 - 2013
N2 - Since the term structure of interest rates embodies information about future economic activity, we extract relative Nelson-Siegel (1987) factors from cross-country yield curve differences to proxy expected movements in future exchange rate fundamentals. Using monthly data for the United Kingdom, Canada, Japan, and the United States, we show that the yield curve factors predict exchange rate movements and explain excess currency returns one month to two years ahead. Our results provide support for the asset pricing formulation of exchange rate determination and offer an intuitive explanation to the uncovered interest parity puzzle by relating currency risk premiums to inflation and business cycle risks. © 2013 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
AB - Since the term structure of interest rates embodies information about future economic activity, we extract relative Nelson-Siegel (1987) factors from cross-country yield curve differences to proxy expected movements in future exchange rate fundamentals. Using monthly data for the United Kingdom, Canada, Japan, and the United States, we show that the yield curve factors predict exchange rate movements and explain excess currency returns one month to two years ahead. Our results provide support for the asset pricing formulation of exchange rate determination and offer an intuitive explanation to the uncovered interest parity puzzle by relating currency risk premiums to inflation and business cycle risks. © 2013 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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U2 - 10.1162/REST_a_00231
DO - 10.1162/REST_a_00231
M3 - RGC 21 - Publication in refereed journal
SN - 0034-6535
VL - 95
SP - 185
EP - 205
JO - Review of Economics and Statistics
JF - Review of Economics and Statistics
IS - 1
ER -