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Can perpetual learning explain the forward-premium puzzle? Author info | Abstract | Publisher info | Download info | Related research | Statistics Chakraborty, Avik
Evans, George W.
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Under rational expectations and risk neutrality the linear projection of exchange-rate change on the forward premium has a unit coefficient. However, empirical estimates of this coefficient are significantly less than one and often negative. We show that replacing rational expectations by discounted least-squares (or "perpetual") learning generates a negative bias that becomes strongest when the fundamentals are strongly persistent, i.e. close to a random walk. Perpetual learning can explain the forward-premium puzzle while simultaneously replicating other features of the data, including positive serial correlation of the forward premium and disappearance of the anomaly in other forms of the test.
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Article provided by Elsevier in its journal Journal of Monetary Economics .
Volume (Year): 55 (2008)
Issue (Month): 3 (April)
Pages: 477-490
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Handle: RePEc:eee:moneco:v:55:y:2008:i:3:p:477-490Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566
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references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
Avik Chakraborty, 2004.
"Learning, the Forward Premium Puzzle and Market Efficiency ,"
University of Oregon Economics Department Working Papers
2005-4, University of Oregon Economics Department, revised 01 Oct 2004.
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George W. Evans & Seppo Honkapohja, 2008.
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