Skip to Main Content
 

Global Search Box

 
 
 
 

Files

File List


osu1054749793.pdf (845.13 KB)

ETD Abstract Container

Abstract Header

Exchange rate dynamics in a continuous-time model of uncovered interest parity with central bank intervention

Moh, Young-Kyu
http://rave.ohiolink.edu/etdc/view?acc_num=osu1054749793

Abstract Details

2003, Doctor of Philosophy, Ohio State University, Economics.
Uncovered interest parity (UIP) is a simple model of international asset market equilibrium that continues to form a key building block in many open economy macro models. Econometric analyses, however, show that it is consistently rejected by the data. Regressions of the future home currency depreciation on the current interest differential yield a slope coefficient that is not only less than unity as predicted by UIP but is typically negative-a finding known as the forward premium anomaly. Recent studies cast doubt on the reliability of the asymptotic inference of these regressions. They claim that autoregressive conditional heteroskedastic effects and nonnormality of the interest differential induce widely dispersed distribution for the OLS slope estimator in these regressions, but do not provide a theory for the basis of the nonstandard features. My thesis provides such a theory and considers whether the continued popularity of UIP is not misplaced by asking whether these and other features in the international financial market data can be consistent with UIP. In continuous time, UIP is a stochastic differential equation. In the solution of this differential equation, the log of exchange rate is a nonlinear function of the exogenous interest differential. To investigate the properties of the model and to examine its ability to explain the data I simulate the model by setting the parameters of the continuous-time model to point estimates obtained by the simulated method of moments. I then discretize the observations to conform to the sampling intervals of the data and evaluate the ability of the model to match the moments of the exchange rate and interest differential data. Two alternative specifications of agent's knowledge and beliefs of central bank intervention are considered in the simulation experiments. The implied distribution of the OLS slope estimator in lies far away from the asymptotic distribution but this small sample distortion is not able to explain the forward premium anomaly. The model is able to explain the forward premium anomaly when interventions take the market by surprise.
Nelson Mark (Advisor)
Economics, Finance
continuous-time uncovered interest parity; forward premium anomaly; exchange rate dynamics

Recommended Citations

Citations

  • Moh, Y.-K. (2003). Exchange rate dynamics in a continuous-time model of uncovered interest parity with central bank intervention [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1054749793

    APA Style (7th edition)

  • Moh, Young-Kyu. Exchange rate dynamics in a continuous-time model of uncovered interest parity with central bank intervention. 2003. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1054749793.

    MLA Style (8th edition)

  • Moh, Young-Kyu. "Exchange rate dynamics in a continuous-time model of uncovered interest parity with central bank intervention." Doctoral dissertation, Ohio State University, 2003. http://rave.ohiolink.edu/etdc/view?acc_num=osu1054749793

    Chicago Manual of Style (17th edition)

osu1054749793
1,326
© 2003, all rights reserved.
This open access ETD is published by The Ohio State University and OhioLINK.