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The forward premium puzzle in a model of imperfect information

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  • Albuquerque, Rui

Abstract

This paper studies the forward premium puzzle in a model with imperfect information. The model predicts fixed effects and conditional heteroskedasticity in the forward premium regression and provides a rationale for the evidence in Mayfield and Murphy [Mayfield, E.S., Murphy, R.G. 1992. Interest rate parity and the exchange risk premium, Economics Letters 40, 319-324].

Suggested Citation

  • Albuquerque, Rui, 2008. "The forward premium puzzle in a model of imperfect information," Economics Letters, Elsevier, vol. 99(3), pages 461-464, June.
  • Handle: RePEc:eee:ecolet:v:99:y:2008:i:3:p:461-464
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    References listed on IDEAS

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    1. Bekaert, Geert & Hodrick, Robert J., 1993. "On biases in the measurement of foreign exchange risk premiums," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 115-138, April.
    2. Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August.
    3. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
    5. Hodrick, Robert J., 1989. "Risk, uncertainty, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 433-459, May.
    6. Robert E. Cumby & Maurice Obstfeld, 1984. "International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence," NBER Chapters,in: Exchange Rate Theory and Practice, pages 121-152 National Bureau of Economic Research, Inc.
    7. Mayfield, E. Scott & Murphy, Robert G., 1992. "Interest rate parity and the exchange risk premium Evidence from panel data," Economics Letters, Elsevier, vol. 40(3), pages 319-324, November.
    8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Modeling money," Working Paper Series, Macroeconomic Issues WP-97-17, Federal Reserve Bank of Chicago.
    9. Bachman, Daniel, 1992. "The effect of political risk on the forward exchange bias: the case of elections," Journal of International Money and Finance, Elsevier, vol. 11(2), pages 208-219, April.
    10. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    11. Canova, Fabio & Marrinan, Jane, 1993. "Profits, risk, and uncertainty in foreign exchange markets," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 259-286, November.
    12. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
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    Cited by:

    1. Matti Suominen & Petri Jylhä, 2009. "Arbitrage Capital and Currency Carry Trade Returns," 2009 Meeting Papers 84, Society for Economic Dynamics.
    2. Jylhä, Petri & Suominen, Matti, 2011. "Speculative capital and currency carry trades," Journal of Financial Economics, Elsevier, vol. 99(1), pages 60-75, January.

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