Working Paper Series, Department of Economics, Uppsala University
No 2002:7:
Exchange rates and long-term bonds
Annika Alexius and Peter Sellin ()
Abstract: Tentative evidence suggests that the empiricalfailure of
uncovered interest parity (UIP) is confined to short-term interest rates.
Tests of UIP for long-term interest rates are however hampered by various
data problems. By focusing on short investments in long-term bonds, these
data problems can be avoided. We study the relationship between the US
dollar - Deutsch Mark exchange rate and German and American bond rates. The
hypothesis that expected returns to investments in bonds denominated in the
two currencies are equal cannot be rejected. This result is not simply due
to low power as the beta-coefficients are close to unity. For the
corresponding short-term interest rates, the typical finding of a large and
significantly negative beta-coefficient is confirmed.
Keywords: Long-term interest rates; exchange rates; uncovered interest parity; (follow links to similar papers)
JEL-Codes: F31; F41; (follow links to similar papers)
21 pages, April 15, 2002, Revised March 2006
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