We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions--in particular, the interest on excess...

We document five novel facts about Uncovered Interest Parity (UIP) deviations vis-à-vis the U.S. dollar for 34 currencies of advanced economies and emerging markets, using survey data on expected exchange rate. First, the UIP premium co-moves with global risk perception (VIX) for all...

Foreign investors' changing appetite for risk-taking have been shown to be a key determinant of the global financial cycle. Such fluctuations in risk sentiment also correlate with the dynamics of UIP premia, capital flows, and exchange rates. To understand how these risk sentiment changes...

In this paper, a vector autoregression model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market. Consider a VAR system of the spot exchange rate (yen/dollar), the domestic (US) interest rate and the foreign (Japanese) interest rate, describing the...

This paper examines covered interest parity between Yen-denominated and dollar-denominated assets: Euro-yen and Euro-dollar three month deposit rates,and the representative and comparable three-month interest rates in Japan andin the U.S. An objective of this paper is to single out the portion...

The proposition that real rates are equal across countries is worth studying because it is central to our understanding of open economy macroeconomics and because it is also an important issue to policy makers. If it is true, then domestic monetary authorities have no control over their real...

A number of macroeconomic models of open economies under flexible exchange rate assume a strong version of perfect capital mobility which implies that currency speculation commands no risk premium. If this assumption is dropped a number of important results no longer obtain. First, the exchange...

Under uncovered interest parity (UIP), the size of the effect on the real exchange rate of an anticipated change in real interest rate differentials is invariant to the horizon at which the change is expected. Empirical evidence using US, euro area and UK data points to a substantial deviation...

For several decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely--even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial...

This paper analyzes how limits to the complexity of statistical models used by market participants can shape asset prices. We consider an economy in which agents can only entertain models with at most k factors, where k may be distinct from the true number of factors that drive the economy's...