Ravi Bansal
Fuqua School of Business, Duke University, Durham, NC 27708
Abstract
Explaining the joint evolution of exchange rates and interest rates is a long standing puzzle in financial economics. This paper presents a new framework to explain the dynamics of the term structure and exchange rates. Many popular term structure models impose precise asset pricing restrictions on this framework. Weekly data for the U.S, Germany and Japan is used to evaluate the ability of the framework to jointly explain the relationships between the term structure movements and exchange rates. This paper also documents new empirical evidence that deepens the puzzles associated with violations of uncovered interest rate parity. It is found that one of the models can indeed explain some of the puzzles associated with the joint evolution of multiple term structures and exchange rates.