Paper on term structure models and exchange rates

The Bank of Canada Working Paper "Can affine term structure models help us predict exchange rates?" proposes an arbitrage-free model of the joint behaviour of interest and exchange rates.

The author proposes an arbitrage-free model of the joint behaviour of interest and exchange rates whose exchange rate forecasts outperform those produced by a random-walk model, a vector autoregression on the forward premiums and the rate of depreciation, and the standard forward premium regression. In addition

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