Official Interventions and Occasional Violations of Uncovered Interest Party in the Dollar-DM Market
Nelson Mark, Young-Kyu Moh
NBER Working Paper No. 9948
This paper presents a model of exchange rate determination in which the forward premium anomaly emerges as the result of unanticipated central bank interventions in the foreign exchange market. Deviations from uncovered interest parity (UIP) therefore represent neither unexploited profit opportunities nor compensation for bearing risk. In simulations, the model generates a forward premium anomaly and matches several other notable features of US-German data. Additional empirical support is obtained from an analysis of Fed and Bundesbank interventions in the dollar--DM market where it is found that the forward premium anomaly intensifies during those times when a central bank intervenes.
This paper was revised on October 2, 2006
Published: Mark, Nelson and Y.K. Moh. “Official Interventions and Occasional Violations of Uncovered Interest Parity in the Dollar-DM Market." Journal of Empirical Finance 14 (September 2007): 499-522.
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