Prague Economic Papers 2002, 11(1):17-37 | DOI: 10.18267/j.pep.186

The uncovered parity properties of the czech koruna

Alexis Derviz
The Czech National Bank, Na Příkopě 28, CZ - 115 03 Prague 1, and Institute of Information Theory and Automation, Pod vodárenskou věží 4, CZ - 182 08 Prague 8 (e-mail: Alexis.Derviz@cnb.cz).

The paper studies the compliance of the CZK - EUR exchange rate with the uncovered parity of returns on assets denominated in the two named currencies. A comparison with the same property for the euro-dollar rate is made. An uncovered total return parity (UTRP) formula is derived from the equilibrium in a portfolio optimization model with liquidity constraints. It is shown that the uncovered parity of total returns, and not of short-term money market rates, is a natural outcome of stochastic equilibrium asset pricing models that generalize the International Consumption-based Capital Asset Pricing Model. Accordingly, the traditional uncovered interest rate parity should be replaced by UTRP in empirical analysis. UTRP tests for the CZK/EUR and the USD/EMU currency pairs are conducted using yields of long-term government bond yields. UTRP typically holds, although the time horizons and measures of exchange rate movements, for which it becomes visible, may vary.

Keywords: uncovered parity, asset prices, portfolio optimization, international consumption-based capital asset pricing model
JEL classification: C61, E44, F31, F41, G11, G12

Published: January 1, 2002  Show citation

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Derviz, A. (2002). The uncovered parity properties of the czech koruna. Prague Economic Papers, 11(1), 17-37. doi: 10.18267/j.pep.186
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