Prof. Kul B Luintel: Liquidity and Exchange Rates: New Evidence from a Bayesian TV-VAR

Date: 23 February 2026, 11:40-12:40  

Location: Corvinus University of Budapest, Building E, Room E.279.1. (Institute of Finance)  

Language of tghe event: English 

Abstract: Recent literature argues that relative Treasury premia, interpreted as relative liquidity or convenience yields, play an important role in explaining exchange rate fluctuations and may help resolve the exchange-rate disconnect puzzle. However, existing empirical approaches abstract from cross-country heterogeneity in currencies and short-term interest rates and rule out time-varying relationships. We address these limitations by modelling nominal exchange rate dynamics and relative convenience yields across G10 currencies using a Bayesian time-varying VAR. We document three main findings. First,  changes in convenience yields and interest rate differentials play no explanatory role in nominal exchange rate movements among core safe-haven currencies, namely the US dollar, Japanese yen, Swiss franc, euro, and British pound. Second, relative Treasury premia significantly explain exchange rate movements for currency pairs involving non-safe-haven G10 currencies, namely AUD, CAD, NOK, NZD, and SEK, both within this group and in pairings with safe-haven currencies. Third, these effects are highly heterogeneous across currencies and time. Our results highlight the importance of cross-country heterogeneity and time-varying dynamics in exchange rate determination.  

Joint work with Yuanli Guo and Guangjie Li. 

Read Prof. Kul B Luintel’s publications. 

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