Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2002:7: Exchange rates and long-term bonds

Annika Alexius and Peter Sellin ()
Additional contact information
Annika Alexius: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Peter Sellin: Sveriges Riksbank, Postal: 103 37 Stockholm, Sweden

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

JEL-codes: F31; F41

21 pages, First version: April 15, 2002. Revised: March 2006.

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wp2002_7.pdf PDF-file 
wp2002_7rev.pdf PDF-file Revised Working paper

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