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Discussion Paper Details

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Title: Multihorizon Currency Returns and Purchasing Power Parity

Author(s): Mikhail Chernov and Drew Creal

Publication Date: April 2018

Keyword(s): affine term structure model, cointegration, multiple horizons, purchasing power parity and uncovered interest parity

Programme Area(s): Financial Economics and International Macroeconomics and Finance

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.

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Bibliographic Reference

Chernov, M and Creal, D. 2018. 'Multihorizon Currency Returns and Purchasing Power Parity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12893