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Affine models of the joint dynamics of exchange rates and interest rates
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Anderson, B., Hammond, Peter J. and Ramezani, Cyrus A. (2010) Affine models of the joint dynamics of exchange rates and interest rates. Journal of Financial and Quantitative Analysis, Vol.45 (No.5). pp. 1341-1365. doi:10.1017/S0022109010000438 ISSN 0022-1090.
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Official URL: http://dx.doi.org/10.1017/S0022109010000438
Abstract
This paper extends the affine class of term structure models to describe the Joint dynamics of exchange rates and interest rates In particular the issue of how to reconcile the low volatility of interest rates with the high volatility of exchange rates is addressed The in complete market approach of introducing exchange rate volatility that is orthogonal to both Interest rates and the pricing kernels is shown to be infeasible in the affine setting Models in which excess exchange rate volatility is orthogonal to Interest rates but not orthogonal to the pricing kernels are proposed and validated via Kalman filter estimation of maximal 5-factor models for 6 country pairs
Item Type: | Journal Article | ||||
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Divisions: | Faculty of Social Sciences > Economics | ||||
Journal or Publication Title: | Journal of Financial and Quantitative Analysis | ||||
Publisher: | Cambridge University Press | ||||
ISSN: | 0022-1090 | ||||
Official Date: | 2010 | ||||
Dates: |
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Volume: | Vol.45 | ||||
Number: | No.5 | ||||
Page Range: | pp. 1341-1365 | ||||
DOI: | 10.1017/S0022109010000438 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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