Interest Expectations and Exchange Rates News

Posted: 18 May 1999

See all articles by Stefano Cavaglia

Stefano Cavaglia

Brinson Partners; Maastricht University - Department of Finance; PanAgora Asset Management, Inc.

Kees C. G. Koedijk

Tilburg University - Department of Finance

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Christian C. P. Wolff

University of Luxembourg; Centre for Economic Policy Research (CEPR)

Abstract

Using a new survey data set of matched exchange rate and interest rate expectations for eight currencies relative to the German mark, we examine empirically the relationship between exchange rate returns, "news" and risk premia. "News" on interest differentials enters significantly in equations for the difference between the spot rate and the lagged forward rate for the British pound, Japanese yen, Spanish peseta and the U.S. dollar. An unexpected rise in the interest rate differential tends to strengthen the domestic exchange rate. For each of these currencies, we also find significant effects of our ex-ante measure of the risk premium. In addition, we investigate the effect of lagged interest rate differentials as proxy for the risk premium and find that they do not capture time-varying risk premia as is widely suggested in the literature, but probably capture a peso-problem, learning about a policy change, a market-inefficiency or a combination of these factors.

JEL Classification: F31

Suggested Citation

Cavaglia, Stefano M. F. G. and Koedijk, Kees G. and Verschoor, Willem F. C. and Wolff, Christian C. P., Interest Expectations and Exchange Rates News. Available at SSRN: https://ssrn.com/abstract=143189

Stefano M. F. G. Cavaglia (Contact Author)

Brinson Partners

209 LaSalle Street
Chicago, IL 60604
United States

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands
31 43 888-838 (Phone)
31 43 270-999 (Fax)

PanAgora Asset Management, Inc.

260 Franklin Street
22nd Floor
Boston, MA 02110
United States
617-439-6385 (Phone)

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Christian C. P. Wolff

University of Luxembourg ( email )

6, rue Richard Coudenhove-Kalergi
Kirchberg Campus
Luxembourg, South 1359
Luxembourg

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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