Forward and Spot Exchange Rates in a Multi-currency World
Tarek Hassan and
Rui Mano
No 20294, NBER Working Papers from National Bureau of Economic Research, Inc
Abstract:
Separate literatures study violations of uncovered interest parity (UIP) using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate regression-based and portfolio-based facts, and to estimate the joint restrictions they place on models of currency returns. Subject to standard assumptions on investors’ information sets, we find that the forward premium puzzle (FPP) and the “dollar trade” anomaly are intimately linked: both are driven almost exclusively by the cross-time component. By contrast, the “carry trade” anomaly is driven largely by cross-sectional violations of UIP. The simplest model the data do not reject features a cross-sectional asymmetry that makes some currencies pay permanently higher expected returns than others, and larger time series variation in expected returns on the US dollar than on other currencies. Importantly, conventional estimates of the FPP are not directly informative about expected returns, because they do not correct for uncertainty about future mean interest rates. Once we correct for this uncertainty, we never reject the null that investors expect high-interest-rate currencies to depreciate, not appreciate.
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-mon and nep-opm
Note: AP IFM ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)
Published as Tarek A Hassan & Rui C Mano, 2019. "Forward and Spot Exchange Rates in a Multi-Currency World*," The Quarterly Journal of Economics, vol 134(1), pages 397-450.
Downloads: (external link)
http://www.nber.org/papers/w20294.pdf (application/pdf)
Related works:
Journal Article: Forward and Spot Exchange Rates in a Multi-Currency World (2019) 
Working Paper: Forward and Spot Exchange Rates in a Multi-currency World (2014) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:20294
Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w20294
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().