TY - UNPB
T1 - UIP: A Partial Reconciliation from Event Studies
AU - Ceballos, Luis
AU - Albagli, Elias
AU - Claro, Sebastian
AU - Romero, Damián
PY - 2021/4/23
Y1 - 2021/4/23
N2 - We develop a model where foreign investors in domestic markets react partially to deviations from a UIP condition for long-term bonds. The model predicts that the sign between yield differentials and exchange rate movements is conditional on the source of shocks. Using event studies for identification, we test the model in a sample of 24 developed and emerging economies, finding a UIP-consistent correlation for monetary shocks, but the opposite around episodes of large market uncertainty. The model predicts that exchange rate stabilization policies, prevalent among emerging countries, weaken both correlations, which we confirm in the data.
AB - We develop a model where foreign investors in domestic markets react partially to deviations from a UIP condition for long-term bonds. The model predicts that the sign between yield differentials and exchange rate movements is conditional on the source of shocks. Using event studies for identification, we test the model in a sample of 24 developed and emerging economies, finding a UIP-consistent correlation for monetary shocks, but the opposite around episodes of large market uncertainty. The model predicts that exchange rate stabilization policies, prevalent among emerging countries, weaken both correlations, which we confirm in the data.
KW - uncovered interest parity
KW - long-term yields
KW - event studies
UR - https://www.mendeley.com/catalogue/238a7d73-2ba8-3de0-a9de-0931c9c66671/
U2 - 10.2139/ssrn.3830716
DO - 10.2139/ssrn.3830716
M3 - Preprint
BT - UIP: A Partial Reconciliation from Event Studies
ER -