Understanding the Forward Premium Puzzle: A Microstructure Approach

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

No 13278, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E30 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-upt
Date: 2007-07
Note: EFG IFM ME
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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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