Time-Varying forward Bias and the Volatility of Risk Premium: a Monetary Explanation
AbstractForward exchange rate unbiassedness is rejected for international exchange markets. This paper proposes a stochastic general equilibrium model which generates substantial variability in the magnitude of predictable excess returns. Simulation exercises suggest that high persistency in the monetary policy produces greater bias in the estimated slope coefficient in the regression of the change in the logarithm of the spot exchange rate on the forward premium. Also, our model suggest that the nature of the transmission between monetary shocks can explain the excess return puzzle. Empirical evidence for the US-UK exchange rate according to our theoretical results is provided.
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Bibliographic InfoPaper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 0214.
Length: pages 32
Date of creation: 2002
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-03 (All new papers)
- NEP-CMP-2003-11-03 (Computational Economics)
- NEP-IFN-2003-11-03 (International Finance)
- NEP-MFD-2003-11-03 (Microfinance)
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