Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197875 
Year of Publication: 
2018
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2018-22
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We propose an uncovered expected returns parity (URP) condition for the bilateral spot exchange rate. URP implies that unilateral exchange rate equations are misspecified and that equity returns also affect exchange rates. Fama regressions provide evidence that URP is statistically preferred to uncovered interest rate parity (UIP) for nominal bilateral exchange rates between the US dollar and six countries (Australia, Canada, Japan, Norway, Switzerland and the UK) at the monthly frequency. An implication of URP is that commodity price changes that affect equity returns thus affect bilateral exchange rates through the equity channel. We find evidence that the Australian, Canadian, Norwegian (post 2001) and UK (post 1992) expected exchange rates increase via the oil-equity channel as oil prices rise, whereas the Japanese and Swiss expected exchange rates decrease.
Subjects: 
Asset pricing
Exchange rates
International financial markets
JEL: 
E43
F31
G15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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