Abstract
In this paper, we empirically investigate the relationship between the convenience yield of government bonds and the real exchange rates using monthly data from 1999 to 2018. We extend the conventional models, based on the present-value relationship between the real exchange rate and economic fundamentals, while explicitly considering the role of the convenience yield. Empirical results suggest that our present-value models can capture the dynamic properties of the real exchange rate documented in the literature, including high persistence, excess volatility and excess co-movement compared with real interest rate differentials. We also find that the sum of expected convenience yields significantly drives real exchange rate movements. Moreover, we find that foreign exchange swap market friction also plays a role in explaining real exchange rates. Finally, we find that monetary policy at the zero lower bound may be essential in real exchange rate modelling.
Chia-Yi Yen
Ph.D. Candidate in Finance
Chia-Yi Yen is currently a finance Ph.D. candidate at the Mannheim Business School in Germany. Her research interest lies in empirical macro finance, mutual funds, and corporate governance. She has published empirical macro finance papers on decent field journals and diligently worked on a number of research projects. Prior to her doctoral studies, she worked as a financial engineer in the fund industry and a data science consultant for financial institutions.