The Forex Forward Puzzle: The Career Risk Hypothesis
AbstractWe conjecture that the forward puzzle may reflect career risks. When professional investors observe public danger signals about a currency, they require a premium for holding it. We find evidence of this in Exchange Rate Mechanism rates. As deep discounts do signal danger, we next specify nonlinear variants of the Fama regression to capture this risk. We also decompose the forward premium into a long-memory trend and short-term component. We find empirical evidence for a career risk premium; risk is in fact dominant in the trend component while the short-term component loads more on expectations. All confidence intervals are calculated via Monte Carlo. Copyright (c) 2009, The Eastern Finance Association.
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Bibliographic InfoArticle provided by Eastern Finance Association in its journal Financial Review.
Volume (Year): 44 (2009)
Issue (Month): 3 (08)
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- Carmen Gloria Silva, 2010. "Forward premium puzzle and term structure of interest rates: the case of New Zealand," Working Papers Central Bank of Chile 570, Central Bank of Chile.
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