Understanding the Forward Premium Puzzle: A Microstructure Approach

Martin Eichenbaum, Sergio Rebelo () and Craig Burnside

No 6399, CEPR Discussion Papers from Centre for Economic Policy Research

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; Uncovered interest parity; Microstructure (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn, nep-mon and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Journal Article: Understanding the Forward Premium Puzzle: A Microstructure Approach (2009)
Working Paper: Understanding the Forward Premium Puzzle: A Microstructure Approach (2007)
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