Discussion paper

DP12893 Multihorizon Currency Returns and Purchasing Power Parity

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.


Chernov, M and D Creal (2018), ‘DP12893 Multihorizon Currency Returns and Purchasing Power Parity‘, CEPR Discussion Paper No. 12893. CEPR Press, Paris & London. https://cepr.org/publications/dp12893