Download or read book Affine Models of the Joint Dynamics of Exchange Rates and Interest Rates written by Bing Han and published by . This book was released on 2003 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper addresses issues in extending the affine class of term structure models to describe the joint dynamics of exchange rates and interest rates. A standard incomplete markets approach is shown to impose many constraints on exchange rate dynamics in affine settings. A canonical multicountry affine model, and the method to estimate it via Kalman filters, are formulated. Familiar difficulties in reconciling the forward premium anomaly with affine models are overcome, by introducing additional state variables which affect only exchange-rate dynamics. This yields a more adequate model of the observed volatilities of exchange rates and their correlation with interest rates.