Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment

Philippe Bacchetta and Eric van Wincoop
Additional contact information
Eric van Wincoop: University of Virginia

No 675, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This objective of this paper is to show that the proposal by Froot and Thaler (2000) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all the moments related to these puzzles.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2018/paper_675.pdf (application/pdf)

Related works:
Journal Article: Puzzling exchange rate dynamics and delayed portfolio adjustment (2021)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2019)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2019)
Working Paper: Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment (2019)
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:red:sed018:675

Access Statistics for this paper

More papers in 2018 Meeting Papers from Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().