TY - JOUR
T1 - Asian interest expectations and exchange rate dynamics
AU - Koedijk, Kees G.
AU - Verschoor, Willem F.C.
PY - 1994/12
Y1 - 1994/12
N2 - Using a new survey data set of matched exchange rate and interest rate expectations for a set of Asian currencies, we empirically implement the "news" version of the Dornbusch-Frankel overshooting model. "News" on interest differentials enters significantly in equations that utilize the difference between the spot rate and the lagged forward rate for Asian exchange rates relative to the US dollar and the Deutsch mark. An unexpected rise in the interest rate differential tends to strengthen the domestic exchange rate. 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 a proxy for the risk premium and find that they do not capture time-varying risk premia as has been widely suggested in the literature, but probably capture a lag effect due to the time it takes to learn about a policy change, a market-inefficiency or a combination of these factors.
AB - Using a new survey data set of matched exchange rate and interest rate expectations for a set of Asian currencies, we empirically implement the "news" version of the Dornbusch-Frankel overshooting model. "News" on interest differentials enters significantly in equations that utilize the difference between the spot rate and the lagged forward rate for Asian exchange rates relative to the US dollar and the Deutsch mark. An unexpected rise in the interest rate differential tends to strengthen the domestic exchange rate. 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 a proxy for the risk premium and find that they do not capture time-varying risk premia as has been widely suggested in the literature, but probably capture a lag effect due to the time it takes to learn about a policy change, a market-inefficiency or a combination of these factors.
KW - Asian exchange rates
KW - Risk premia
KW - Survey data
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U2 - 10.1016/0927-538X(94)90004-3
DO - 10.1016/0927-538X(94)90004-3
M3 - Article
AN - SCOPUS:43949157246
SN - 0927-538X
VL - 2
SP - 439
EP - 452
JO - Pacific-Basin Finance Journal
JF - Pacific-Basin Finance Journal
IS - 4
ER -
