Advanced Search
MyIDEAS: Login to save this paper or follow this series

Ambiguity Aversion: Implications For The Uncovered Interest Rate Parity Puzzle

Contents:

Author Info

  • COSMIN ILUT

    (NORTHWESTERN UNIVERSITY)

Abstract

positive domestic interest rate differential predicts that the domestic currency will appreciate in the future. The reason capital inflows into high-interest-rate currencies are limited in the model is that agents tend to overstate the probability of a future depreciation. I show that my result cannot be duplicated in a simple model with risk aversion. In addition to providing a resolution to the UIP puzzle, the model predicts, consistent with the data, negative skewness and excess kurtosis for carry trade payoffs and positive average payoffs even for hedged positions.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.economicdynamics.org/meetpapers/2009/paper_328.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 328.

as in new window
Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:red:sed009:328

Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Larry G. Epstein & Martin Schneider, 2007. "Learning Under Ambiguity," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1275-1303.
  2. Nicolas Vincent & Isaac Kleshchelski, 2008. "Robust Equilibrium Yield Curves," 2008 Meeting Papers 486, Society for Economic Dynamics.
  3. Hanno Lustig & Adrien Verdelhan, 2004. "The Cross-Section of Foreign Currency Risk Premia and US Consumption Growth Risk," 2004 Meeting Papers 136c, Society for Economic Dynamics.
  4. Adrien Verdelhan, 2006. "A Habit-Based Explanation of the Exchange Rate Risk Premium," Computing in Economics and Finance 2006 217, Society for Computational Economics.
  5. George W. Evans & Avik Chakraborty, 2006. "Can Perpetual Learning Explain the Forward Premium Puzzle?," University of Oregon Economics Department Working Papers 2006-8, University of Oregon Economics Department, revised 20 Aug 2006.
  6. John C. Williams & Andrew T. Levin, 2003. "Robust Monetary Policy with Competing Reference Models," Computing in Economics and Finance 2003 291, Society for Computational Economics.
  7. Lustig, H. & Verdelhan, A., 2006. "The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk," Working papers 155, Banque de France.
  8. Emmanuel Farhi, 2008. "Rare Disasters and Exchange Rates," 2008 Meeting Papers 47, Society for Economic Dynamics.
  9. Philippe Bacchetta & Elmar Mertens & Eric van Wincoop, 2006. "Predictability in Financial Markets: What Do Survey Expectations Tell Us?," Working Papers 102006, Hong Kong Institute for Monetary Research.
  10. Almuth Scholl & Harald Uhlig, 2006. "New Evidence on the Puzzles: Monetary Policy and Exchange Rates," Computing in Economics and Finance 2006 5, Society for Computational Economics.
  11. Tomasz Strzalecki, 2011. "Axiomatic Foundations of Multiplier Preferences," Econometrica, Econometric Society, vol. 79(1), pages 47-73, 01.
  12. Lucio Sarno, 2005. "Towards a Solution to the Puzzles in Exchange Rate Economics: Where Do We Stand?," Working Papers wp05-11, Warwick Business School, Finance Group.
  13. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
  14. Francois Gourio, 2008. "Disasters and Recoveries," American Economic Review, American Economic Association, vol. 98(2), pages 68-73, May.
  15. Kaminsky, Graciela, 1993. "Is There a Peso Problem? Evidence from the Dollar/Pound Exchange Rate, 1976-1987," American Economic Review, American Economic Association, vol. 83(3), pages 450-72, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Oscar Jorda, 2010. "Carry Trade," Working Papers 1019, University of California, Davis, Department of Economics.
  2. Francis Breedon & Dagfinn Rime & Paolo Vital, 2010. "A Transaction Data Study of the Forward Bias Puzzle," Working Paper 2010/26, Norges Bank.
  3. Jordà, Òscar & Taylor, Alan M., 2009. "The Carry Trade and Fundamentals: Nothing to Fear But FEER Itself," CEPR Discussion Papers 7568, C.E.P.R. Discussion Papers.
  4. Tarek A. Hassan & Rui C. Mano, 2014. "Forward and Spot Exchange Rates in a Multi-currency World," NBER Working Papers 20294, National Bureau of Economic Research, Inc.
  5. Krahnen, Jan Pieter & Ockenfels, Peter & Wilde, Christian, 2014. "Measuring ambiguity aversion: A systematic experimental approach," SAFE Working Paper Series 55, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  6. Massimo Guidolin & Francesca Rinaldi, 2011. "Ambiguity in Asset Pricing and Portfolio Choice: A Review of the Literature," Working Papers 417, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. Jesus Crespo Cuaresma & Mauro Costantini & Jaroslava Hlouskova, 2014. "Can Macroeconomists Get Rich Forecasting Exchange Rates?," Department of Economics Working Papers wuwp176, Vienna University of Economics, Department of Economics.
  8. Olivier Coibion & Yuriy Gorodnichenko, 2012. "Information Rigidity and the Expectations Formation Process," IMF Working Papers 12/296, International Monetary Fund.
  9. Engel, Charles, 2011. "The Real Exchange Rate, Real Interest Rates, and the Risk Premium," Economics Series 265, Institute for Advanced Studies.
  10. Travis Berge & Òscar Jordà & Alan M. Taylor, 2010. "Currency Carry Trades," NBER Chapters, in: NBER International Seminar on Macroeconomics 2010, pages 357-387 National Bureau of Economic Research, Inc.
  11. Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.
  12. Charles Engel, 2013. "Exchange Rates and Interest Parity," NBER Working Papers 19336, National Bureau of Economic Research, Inc.
  13. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," Working Papers 102, Department of Economics, College of William and Mary.
  14. Adrien Verdelhan, 2012. "The Share of Systematic Variation in Bilateral Exchange Rates," 2012 Meeting Papers 763, Society for Economic Dynamics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:sed009:328. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.