Chapter 1; Risk Premiums -- Chapter 2: FX Forwards and the Carry Trade -- Chapter 3; Exchange Rates, Interest Rates, Inflation and the Risk Premium -- Chapter 4; The Mundell Fleming Model of the Exchange Rate -- Chapter 5: Valuation Models (PPP, DEER, FEER)? -- Chapter 6: What Drives Inflation and...

Posing a major challenge to economic orthodoxy, <i>Imperfect Knowledge Economics</i> asserts that exact models of purposeful human behavior are beyond the reach of economic analysis. Roman Frydman and Michael Goldberg argue that the longstanding empirical failures of conventional economic models stem...

This note re-examines the results of tests of the hypothesis that the forward exchange rate is an unbiased and efficient predictor of the future spot exchange rate. As an alternative hypothesis we posit the existence of a time-varying risk premium. We show that it is possible to place a...

It is widely thought that neither the foreign exchange markets nor equity markets are efficient, in the sense that tests of the unbiasedness hypothesis and of the present value relationship, respectively, typically lead to rejection. Interest has therefore turned to whether a risk premium...

Risky arbitraging based on interest rate differentials between two countries is typically referred to as a carry trade. Up until the recent global financial crisis, these trades generated years of persistent positive returns, which were hard to reconcile with standard pricing kernels. In 2008...

In a model where a variable Y is proportional to the present value, with constant discount rate, of expected future values of a variable y, the "spread" S - Y - qy will be stationary for some q whether or not y must be differenced to induce stationarity. Thus, Y and y are cointegrated. The model...

We propose in this paper a likelihood-based framework forcointegration analysis in panels of a fixed number of vector errorcorrection models. Maximum likelihood estimators of thecointegrating vectors are constructed using iterated GeneralizedMethod of Moments estimators. Using these estimators...