Currency and Yield Co-Integration between a Developed and an Emerging Country: The Case of Turkey

Boğaziçi Journal, Vol. 21, pp. 1-2, pp. 1-20, 2007

Posted: 5 Dec 2009

Date Written: 2007

Abstract

The relationship between currencies and interest rates of different maturities is examined in the Turkish-US context. The real exchange rate between the new Turkish lira (YTL) and the US dollar is found to depend on both short- and long-term real US-Turkish interest rate differences. Cointegrating regressions generate negative and significant coefficients for long-rate differential, consistent with uncovered interest parity and the expectations hypothesis. On the other hand, positive coefficients for real short-term rate differential reveal the forward premium puzzle and the failure of uncovered interest parity for short-horizons. Results are partly driven by the very different risk characteristics of short-term US bonds and the Turkish currency.

Keywords: Exchange rates, Interest rates, Uncovered interest parity, Forward premium puzzle

JEL Classification: F31, E43, G14

Suggested Citation

Inci, Ahmet Can, Currency and Yield Co-Integration between a Developed and an Emerging Country: The Case of Turkey (2007). Boğaziçi Journal, Vol. 21, pp. 1-2, pp. 1-20, 2007, Available at SSRN: https://ssrn.com/abstract=1518121

Ahmet Can Inci (Contact Author)

Bryant University ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

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