Understanding the Forward Premium Puzzle: A Microstructure Approach

Craig Burnside (), Martin Eichenbaum () and Sergio Rebelo ()

No 6399, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Exchange rates; microstructure; Uncovered interest parity (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn, nep-mon and nep-mst
Date: 2007-07
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Related works:
Working Paper: Understanding the Forward Premium Puzzle: A Microstructure Approach (2007)
Journal Article: Understanding the Forward Premium Puzzle: A Microstructure Approach (2009)
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