IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Learning, the Forward Premium Puzzle and Market Efficiency

  • Avik Chakraborty

    ()

    (University of Oregon - Student)

The Forward Premium Puzzle is one of the most prominent empirical anomalies in international finance. The forward premium predicts exchange rate depreciation but typically with the opposite sign and smaller magnitude than specified by rational expectations, a result also considered to indicate inefficiency in the foreign exchange market. This paper proposes a resolution of the puzzle based on recursive least squares learning applied to a simple model of exchange rate determination. The key assumption is that risk neutral agents are not blessed with rational expectations and do not have perfect knowledge about the market. Agents learn about the parameters underlying the stochastic process generating the exchange rate using constant gain recursive least squares. When exchange rate data are generated from the model and the empirical tests are performed, for plausible parameter values the results replicate the anomaly along with other observed empirical features of the forward and spot exchange rate data.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://economics.uoregon.edu/papers/UO-2005-4_Chakraborty_Puzzle.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Bill Harbaugh)


Download Restriction: no

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2005-4.

as
in new window

Length: 36
Date of creation: 01 Oct 2004
Date of revision: 01 Oct 2004
Handle: RePEc:ore:uoecwp:2005-4
Contact details of provider: Postal: 1285 University of Oregon, 435 PLC, Eugene, OR 97403-1285
Phone: (541) 346-4661
Fax: (541) 346-1243
Web page: http://economics.uoregon.edu/Email:


More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ore:uoecwp:2005-4. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bill Harbaugh)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.