Download or read book Understanding the Forward Premium Puzzle written by Craig Burnside and published by . This book was released on 2007 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: High-interest-rate currencies tend to appreciate relative to low-interest-rate currencies. We argue that adverse-selection problems between participants in foreign exchange markets can account for this 'forward premium puzzle.' The key feature of our model is that the adverse selection problem facing market makers is worse when, based on public information, a currency is expected to appreciate.

Download or read book An Explanation of the Forward Premium Puzzle written by Jacob Boudoukh and published by . This book was released on 2014 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: The forward premium anomaly, i.e., the empirical evidence that exchange rate changes are negatively related to interest rate differentials, is one of the most robust puzzles in financial economics. We add to this literature by recasting the underlying parity relation in terms of cross-country differences between forward interest rates rather than spot interest rates. The differences using spot and maturity-matched forward rates are dramatic. As the maturity of the forward interest rate differential increases, the anomalous sign on the coefficient in the traditional specification is reversed, and the explanatory power increases. We present a simple model of interest rates, inflation, and exchange rates that explains this novel empirical evidence. The model is based on interest rate distortions due to Taylor rules and exchange rate determination involving not just purchasing power parity, but also effects due to real rate differentials and subsequent reversion of the exchange rate to fundamentals. We develop and test additional implications of this model. A key finding is that the effect of current interest rate differentials on exchange rates can be decomposed into two offsetting components, which, if used separately, greatly increase the explanatory power of regression models for exchange rates.hry 2451/25922hry 2451/25922.

Download or read book The Forward Premium Puzzle Revisited written by Guy Meredith and published by International Monetary Fund. This book was released on 2002-02 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: The forward premium is a notoriously poor predictor of exchange rate movements. This failure must reflect deviations from risk neutrality and/or rational expectations. In addition, a mechanism is needed that generates the appropriate correlation between the forward premium and shocks arising from risk premia or expectations errors. This paper extends McCallum (1994) to show how such a correlation can arise from the response of monetary policy to output and inflation, which are in turn affected by the exchange rate. The theoretical models considered all generate results that are consistent with the forward premium being a biased predictor of short-term exchange rate movements; the bias decreases, however, as the horizon of the exchange rate change lengthens. Another common feature of the models is that the true reduced-form equation for exchange rate changes contains variables other than the interest differential, providing a justification for "eclectic" relationships for forecasting exchange rates. The results, however, remain consistent with using uncovered interest parity as a building block for structural models.

Download or read book A Sentiment Based Explanation of the Forward Premium Puzzle written by Jianfeng Yu and published by . This book was released on 2015 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: A sentiment-based model of the exchange rate is proposed to understand the forward premium puzzle. Agents over- or underestimate the growth rate of the economy. All else equal, when perceived domestic growth is higher than perceived foreign growth, the domestic interest rate is higher than the foreign interest rate. At the same time, an econometrician would expect an increase in the home currency value. Together, the model with investor misperception can account for the forward premium puzzle. In addition, it helps lower correlation between consumption growth differentials and exchange rate growth. Finally, this paper provides empirical evidence supporting the mechanism in the sentiment-based explanation.

Download or read book An Explanation of the Forward Premium Puzzle written by Shu Yan and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Existing literature reports an empirical puzzle about the foreign exchange forward premium, the spread between the forward rate and the concurrently-observed spot exchange rate. The premium is often negatively correlated with subsequent changes in the spot rate. This defies economic intuition and possibly violates market efficiency. Various explanations have been offered, ranging from non-stationary risk premia through econometric mis-specifications. Some researchers have accepted the puzzle as a fact of inefficient foreign exchange markets, a phenomenon that provides profitable trading opportunities. We suggest there is really no puzzle at all. The simplest conceivable model adequately fits the data; forward exchange rates are unbiased predictors of subsequent spot rates. The puzzle has arisen because (a) the forward rate, the spot rate, and the forward premium all follow non-stationary (or nearly so) time series processes, and (b) the forward rate is a noisy predictor. We document these features with an extended sample and show how they can give the delusion of a puzzle.

Download or read book An Explanation of the Forward Premium Puzzle written by Richard Roll and published by . This book was released on 1998 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Forward Premium Puzzle written by Ravi Bansal and published by . This book was released on 1999 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Forward Premium Puzzle Only Emerges Gradually written by Kerstin Bernoth and published by . This book was released on 2007 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Forward Premium Puzzle and Latent Factors Day by Day written by Kerstin Bernoth and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Time Horizon of the Forward Premium Puzzle written by Linh Thuy To and published by . This book was released on 2007 with total page 118 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this study, the forward premium anomaly is revisited. Not only that the forward exchange rate is a biased predictor of the future spot rate, the direction is robustly determined as being opposite to the theoretical prediction under risk-neutral efficient markets hypothesis. The study takes a unique approach by analyzing the time horizon of the forward rate, ranging from one-month to twelve-month maturities, in seven major exchange rates. Classical explanations for the anomaly suggest opposing ideas on whether the maturity horizon affects the degree of bias of the forward rate. We find a consistent pattern describing that the severity of the anomaly increases with the maturity horizon, implying that time-varying risk premium and irrational expectations are still the best candidates for explaining the puzzle. Further, we test and find evidence supporting the time-varying risk premium explanation in a robust framework.

Download or read book The Forward Premium Puzzle written by Kerstin Bernoth and published by . This book was released on 2007 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The forward premium puzzle revisited written by and published by . This book was released on 2002 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Resolving the Unbiasedness and Forward Premium Puzzles written by Daniel L. Thornton and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: "There are two unresolved puzzles in the empirical foreign exchange literature. The first is the finding that tests of forward rate unbiasedness using the forward rate and forward premium equations yield markedly different conclusions. A companion puzzle--the forward premium puzzle--is the fact that the forward premium incorrectly predicts the direction of the subsequent change in the spot rate, which implies a massive rejection of uncovered interest parity. This paper resolves both puzzles"--Federal Reserve Bank of St. Louis web site.

Download or read book The Forward Premium Puzzle and the Euro written by Jun Nagayasu and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Learning and the Forward Premium Puzzle written by Avik Chakraborty and published by . This book was released on 2005 with total page 188 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Forward Premium is Still a Puzzle written by Craig Burnside and published by . This book was released on 2007 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Disappearance of the Forward Premium Puzzle in Short Horizons written by Liang Ding and published by . This book was released on 2007 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the forward premium puzzle based on the most recent data for different horizons. The paper finds that the well-known puzzle disappears in short horizons, such as one day, but continues to exist in medium horizons such as one week or one month. This finding is proved to be robust relative to different time periods, transaction costs, and both the sign and the high persistency of the forward premium. This new finding also suggests that information integration and expectations formation in the foreign exchange market are potentially the most promising directions to approximate the ultimate solution to the puzzle.