Economic Policy Uncertainty and the Uncovered Interest Rate Parity of Exchange Rate Determination

Author

Yanyan Freitag, Sacred Heart University

Date of Award

6-2024

Degree Type

Doctoral Dissertation

Degree Name

Doctor of Business Administration (DBA)

Comments

Submitted as partial fulfillment of the requirements for the degree of Doctor of Business Administration in Finance Sacred Heart University, Jack Welch College of Business and Technology, Sacred Heart University

Dissertation Number DBA01/2024

Dissertation Supervisor

Dr. Lucjan T. Orlowski

Committee Member

Dr. Michael D. Herley

Committee Member

Dr. W. Keener Hughen

Abstract

I argue that the Uncovered Interest Rate Parity (UIRP) relationship depends on the Economic Policy Uncertainty zones (EPU). The UIRP-EPU relationship is state-dependent, non-linear, and asymmetric. Using the monthly data for the sample period January 1999 to December 2023, I test the relationship between changes in the U.S. Dollar in the Euro exchange rate and the spread between the yields on the 10-year U.S. Treasury Note vs. the euro area 10-year convergence bond. The relationship is tested at three different zones or ‘levels’ of the EPU for the U.S. The low, intermediate, and high EPU zones are determined by employing the Self Exciting Threshold Autoregressive (SETAR 2,p) test. The UIRP-EPU relationship dynamics are further examined using the two-state Markov Switching Multifractal test. The key findings suggest a positive co-movement between the exchange rate and the bond spread in the high and low EPU zones and a negative co-movement in the intermediate uncertainty zone.

Highlights:

• The Uncovered Interest Parity condition based on the relationship between the USD in EUR Exchange Rate and the spread between the yields on the 10-year U.S. Treasury Note and the euro area convergence bond is examined at three different Economic Policy Uncertainty zones.
• The empirical testing is based on monthly data for the January 1999-December 2023 sample period.
• The EPU for U.S. zones is identified by using the SETAR(2,p) test.
• The UIRP-EPU relationship is further examined with Multiple Breakpoint regression and Markov Switching Multifractal tests.

JEL Classification

C58, F31, G15

Recommended Citation

Freitag, Y. (2024). Economic policy uncertainty and the uncovered interest rate parity of exchange rate determination. Jack Welch College of Business & Technology dissertation, Sacred Heart University, Fairfield CT. Retrieved from https://digitalcommons.sacredheart.edu/wcob_theses/41/

Creative Commons License

This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.