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Interpreting the Forward Premium Anomoly

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One of the central issues in international finance concerns the forward premium anomaly: changes in spot exchange rates are inversely related to the premium of forward rates over spot rates. The authors construct a numerical example of a theoretical economy with this property and discuss its potential as an explanation of the anomaly.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 15.

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Handle: RePEc:cmu:gsiawp:15

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Cited by:
  1. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2009. "Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 851-878.
  2. Maurice J. Roche & Michael J. Moore, 1999. "Less of a puzzle: a new look at the forward forex market," Economics, Finance and Accounting Department Working Paper Series n910799, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  3. Costa, Carlos Eugênio da & Issler, João Victor & Matos, Paulo F., 2012. "The Forward- and the Equity-Premium Puzzles: Two Symptoms of the Same Illness?," Economics Working Papers (Ensaios Economicos da EPGE) 732, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  4. Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 13-32.

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