Exchange Rate Dynamics, Learning and Misperception
We propose a new explanation for the forward-premium and the delayed-overshooting puzzles. Both puzzles arise from a systematic under-reaction of short-term interest rate forecasts to current innovations. Accordingly, the forward premium is always a biased predictor of future depreciation; the bias can be so severe as to lead to negative coeffcients in the 'Fama' regression; delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of under-reaction; lastly, for G-7 countries against the U.S., these puzzles can be rationalized for values of the model's parameters that match empirical estimates
|Date of creation:||Dec 2002|
|Date of revision:|
|Publication status:||published as Gourinchas, Pierre-Olivier and Aaron Tornell. "Exchange Rate Puzzles and Distorted Beliefs." Journal of International Economics 64, 2 (December 2004): 303-333.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
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.:
- David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990.
NBER Working Papers
3242, National Bureau of Economic Research, Inc.
- Harrison Hong & Jeremy C. Stein, 1997.
"A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets,"
NBER Working Papers
6324, National Bureau of Economic Research, Inc.
- Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
- David Backus & Silverio Foresi & Chris Telmer, 1996.
"Affine Models of Currency Pricing,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
96-9, New York University, Leonard N. Stern School of Business-.
- Scharfstein, David S & Stein, Jeremy C, 1990.
"Herd Behavior and Investment,"
American Economic Review,
American Economic Association, vol. 80(3), pages 465-79, June.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9391. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.