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Time-varying international diversification and the forward premium

  • Jonen, Benjamin
  • Scheuring, Simon
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    This paper reproduces the slope of the uncovered interest rate parity (UIP) regression for ten country pairs within one standard deviation under rational expectations. We propose an infinite horizon dynamic stochastic general equilibrium model with incomplete markets. Heterogeneous investors experience varying risk aversion as a result of habit formation.

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    File URL: http://www.sciencedirect.com/science/article/pii/S026156061300137X
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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 40 (2014)
    Issue (Month): C ()
    Pages: 128-148

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    Handle: RePEc:eee:jimfin:v:40:y:2014:i:c:p:128-148
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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    20. Charles Engel, 1990. "On the foreign exchange risk premium in a general equilibrium model," Research Working Paper 90-06, Federal Reserve Bank of Kansas City.
    21. Philippe Bacchetta & Eric van Wincoop, 2010. "Infrequent Portfolio Decisions: A Solution to the Forward Discount Puzzle," American Economic Review, American Economic Association, vol. 100(3), pages 870-904, June.
    22. 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.
    23. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
    24. Robert J. Hodrick & Sanjay Srivastava, 1985. "The Covariation of Risk Premiums and Expected Future Spot Exchange Rates," NBER Working Papers 1749, National Bureau of Economic Research, Inc.
    25. Zoran Ivkovic & Scott Weisbenner, 2005. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," Journal of Finance, American Finance Association, vol. 60(1), pages 267-306, 02.
    26. Felix Kubler & Karl Schmedders, 2005. "Approximate versus Exact Equilibria in Dynamic Economies," Econometrica, Econometric Society, vol. 73(4), pages 1205-1235, 07.
    27. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
    28. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
    29. Bing Han, 2004. "Is the forward premium puzzle universal?," Applied Economics Letters, Taylor & Francis Journals, vol. 11(2), pages 131-134.
    30. Fama, Eugene F & Farber, Andre, 1979. "Money, Bonds, and Foreign Exchange," American Economic Review, American Economic Association, vol. 69(4), pages 639-49, September.
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