Convenience yield and real exchange rate dynamics: A present-value interpretation

Yu-Hsi Chou, Chia-Yi Yen

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1 Citation (Scopus)


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.
Original languageEnglish
Pages (from-to)453-489
Number of pages37
JournalCanadian Journal of Economics
Issue number2
Publication statusPublished - 2023

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