Understanding the Forward Premium Puzzle: A Microstructure Approach

High-interest-rate currencies tend to appreciate relative to low-interest-rate currencies. We argue that adverse-selection problems between participants in foreign exchange markets can account for this 'forward premium puzzle.' The key feature of our model is that the adverse selection problem facing market makers is worse when, based on public information, a currency is expected to appreciate.

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Year of publication:	2007-07
Authors:	Eichenbaum, Martin ; Burnside, Craig ; Rebelo, Sergio
Institutions:	National Bureau of Economic Research (NBER)

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Extent:	application/pdf
Series:	NBER Working Papers.
Type of publication:	Book / Working Paper
Notes:	EFG IFM ME published as Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2009. "Understanding the Forward Premium Puzzle: A Microstructure Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 127-54, July. Number 13278
Classification:	E30 - Prices, Business Fluctuations, and Cycles. General ; F31 - Foreign Exchange
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005580387