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Trends in Expected Returns in Currency and Bond Markets

  • Martin D. Evans
  • Karen K. Lewis

Under conventional notions about rational expectations and market efficiency, expected returns differ from the actual expost returns by a forecast error that is uncorrelated with current information. In this paper, we describe how small departures from conventional notions of rational expectations and market efficiency can produce trends in excess returns. These trends are in addition to the trends typically found in the level of asset prices themselves. We report strong evidence for the presence of additional trends in excess foreign exchange and bond returns. We also estimate the additional trend component in excess returns on foreign exchange and find that it varied between -.8% and 1% for one month returns and between -6% and 8% for three month returns.

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File URL: http://www.nber.org/papers/w4116.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4116.

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Date of creation: Jul 1992
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Publication status: published as European Economic Review, vol. 37, June 1993, pp. 1005-1020
Handle: RePEc:nbr:nberwo:4116
Note: AP IFM
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  16. Martin D. Evans & Karen K. Lewis, 1992. "Peso Problems and Heterogeneous Trading: Evidence From Excess Returns in Foreign Exchange and Euromarkets," NBER Working Papers 4003, National Bureau of Economic Research, Inc.
  17. Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
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