scholarly journals A Theory of Exchange Rates and the Term Structure of Interest Rates

2013 ◽  
Vol 17 (1) ◽  
pp. 74-87 ◽  
Author(s):  
Hyoung-Seok Lim ◽  
Masao Ogaki
Keyword(s):  
Exchange Rates ◽  
Interest Rates ◽  
Term Structure

scholarly journals Dynamic spillovers between the term structure of interest rates, bitcoin, and safe-haven currencies

2021 ◽  
Vol 7 (1) ◽  
Author(s):  
David Y. Aharon ◽  
Zaghum Umar ◽  
Xuan Vinh Vo
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Dynamic Analysis ◽  
Interest Rates ◽  
Static Analysis ◽  
Term Structure ◽  
Yield Curve ◽  
Empirical Support ◽  
Safe Haven ◽  
The Exchange Rate

AbstractThis study examines the connectedness between the US yield curve components (i.e., level, slope, and curvature), exchange rates, and the historical volatility of the exchange rates of the main safe-haven fiat currencies (Canada, Switzerland, EURO, Japan, and the UK) and the leading cryptocurrency, the Bitcoin. Results of the static analysis show that the level and slope of the yield curve are net transmitters of shocks to both the exchange rate and its volatility. The exchange rate of the Euro and the volatility of the Euro and the Canadian dollar exchange rate are net transmitters of shocks. Meanwhile, the curvature of the yield curve and the Japanese Yen, Swiss Franc, and British Pound act mainly as net receivers. Our static connectedness analysis shows that Bitcoin is mainly independent of shocks from the yield curve’s level, slope, and curvature, and from any main currency investigated. These findings hint that Bitcoin might provide hedging benefits. However, similar to the static analysis, our dynamic analysis shows that during different periods and particularly in stressful times, Bitcoin is far from being isolated from other currencies or the yield curve components. The dynamic analysis allows us to observe Bitcoin’s connectedness in times of stress. Evidence supporting this contention is the substantially increased connectedness due to policy shocks, political uncertainty, and systemic crisis, implying no empirical support for Bitcoin’s safe-haven property during stress times. The increased connectedness in the dynamic analysis compared with the static approach implies that in normal times and especially in stressful times, Bitcoin has the property of a diversifier. The results may have important implications for investors and policymakers regarding their risk monitoring and their assets allocation and investment strategies.

Information Content of Implied Forward Exchange Rates

2003 ◽  
Vol 11 (1) ◽  
pp. 1-23
Author(s):  
Seong Hun Kim ◽  
Dong Se Cha
Keyword(s):  
Exchange Rates ◽  
Interest Rates ◽  
Error Correction ◽  
Information Content ◽  
Term Structure ◽  
Error Correction Model ◽  
Fisher Effect ◽  
Interest Rate Parity ◽  
Correction Model ◽  
Forward Rates

This paper analyzes the information content of the forward exchange rates implied by the interest rate parity, using the Korea and U.S. interest rates and Won/dollar exchange rates observed during the period of March 1991 to December 2002. First, we test the cointegration between implied forward exchange rates and future spot exchange rates to examine their longrun relationship, and find the existence of cointegration. Next, we examine the international Fisher effect and estimate an error correction model for their shortrun relationship. Our analysis supports the international Fisher effect for longer maturities. Our result also supports the error correction model that states that the future spot exchange rates will be adjusted reflecting the information contained in the past-period implied forward rates which is not fully reflected to current spot rates. Finally, we also find that the term structure of implied forward exchange rates is associated with the changes in future spot rates for longer maturities. Based on our findings, we conclude that the longrun relationship exists between the implied forward exchange rates and future spot exchange rates, and the shortrun deviation from the relationship tend to disappear as they return to the longrun relationship in the course of time.

Affine Models of the Joint Dynamics of Exchange Rates and Interest Rates

2010 ◽  
Vol 45 (5) ◽  
pp. 1341-1365 ◽  
Author(s):  
Bing Anderson ◽  
Peter J. Hammond ◽  
Cyrus A. Ramezani
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Interest Rates ◽  
Term Structure ◽  
Exchange Rate Volatility ◽  
Factor Models ◽  
Joint Dynamics ◽  
High Volatility ◽  
Market Approach ◽  
Pricing Kernels

AbstractThis paper extends the affine class of term structure models to describe the joint dynamics of exchange rates and interest rates. In particular, the issue of how to reconcile the low volatility of interest rates with the high volatility of exchange rates is addressed. The incomplete market approach of introducing exchange rate volatility that is orthogonal to both interest rates and the pricing kernels is shown to be infeasible in the affine setting. Models in which excess exchange rate volatility is orthogonal to interest rates but not orthogonal to the pricing kernels are proposed and validated via Kalman filter estimation of maximal 5-factor models for 6 country pairs.

scholarly journals THE TERM STRUCTURE OF CURRENCY HEDGE RATIOS

2011 ◽  
Vol 14 (04) ◽  
pp. 525-557 ◽  
Author(s):  
OLAF KORN ◽  
PHILIPP KOZIOL
Keyword(s):  
Exchange Rates ◽  
Interest Rates ◽  
Term Structure ◽  
Management Strategies ◽  
Vector Autoregressive Models ◽  
Vector Autoregressive ◽  
Hedge Ratios ◽  
Risk Management Strategies ◽  
Different Sources

This paper investigates the variance minimizing currency forward hedge of an exporting firm that is exposed to different sources of risk. In an empirical study, we quantify the corresponding hedge ratios of a "typical" German firm for different hedge horizons. Based on cointegrated vector autoregressive models of prices, interest rates and exchange rates, we show that hedge ratios decrease substantially with the hedge horizon for different currencies, reaching values of one half or less for a ten-years horizon. Our findings can partly explain underhedging of long-term exchange rate exposures and have important implications for the design of risk management strategies.

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