Regressions often use pre-orthogonalized regressors: prior to the main regression, an independent variable xi is regressed upon the other regressor(s), and its residuals are used in the right-hand side of the main regression instead of the raw variable itself. For example, the exposure of a...

<heading id="h1" level="1" implicit="yes" format="display">ABSTRACT</heading> The forward puzzle is traditionally explained as the presence of a covariance-risk premium, market friction or limits to arbitrage. Recently, Liu and Sercu, working on intra-ERM rates for the DEM, presented evidence consistent with career risk considerations: portfolio managers shun...

We conjecture that the forward puzzle may reflect career risks. When professional investors observe public danger signals about a currency, they require a premium for holding it. We find evidence of this in Exchange Rate Mechanism rates. As deep discounts do signal danger, we next specify...