Reportgreen2011

The Forward Premium Puzzle in a Two-Country World

43 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

Abstract

I explore the behavior of asset prices and the exchange rate in a two-country world.When the large country has bad news, the relative price of the small country's output declines.As a result, the small country's bonds are risky, and uncovered interest parity fails, with positive excess returns available to investors who borrow at the large country's interest rate and lend at the small country's interest rate.I use a diagrammatic approach to derive these and other results in a calibration-free way.

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References

1973An Intertemporal Capital Asset Pricing Model 1978Asset Prices in an Exchange Economy 1997Foundations of International Macroeconomics 1979An intertemporal asset pricing model with stochastic consumption and investment opportunities 1990The Economics of Modern Manufacturing: Technology, Strategy, and Organization 1986The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors 2006Rare Disasters and Asset Markets in the Twentieth Century*1984Forward and spot exchange rates

Cited by

2013Forward and Spot Exchange Rates in a Multi-Currency World 2016After the tide: Commodity currencies and global trade 2014Forward and Spot Exchange Rates in a Multi-currency World 2014International Liquidity and Exchange Rate Dynamics 2013International Liquidity and Exchange Rate Dynamics 2024FINANCIAL DOLLARIZATION IN EMERGING MARKETS: AN INSURANCE ARRANGEMENT 2013

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