Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment

Philippe Bacchetta and Eric van Wincoop
Additional contact information
Eric van Wincoop: University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

No 19-35, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The objective of this paper is to show that the proposal by Froot and Thaler (1990) 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 targeted moments related to these puzzles.

Pages: 49 pages
Date: 2019-07
New Economics Papers: this item is included in nep-mon and nep-opm
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Citations: View citations in EconPapers (9)

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3414966 (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 (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1935

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