The forward premium anomaly: can sticky-price models generate volatile foreign exchange risk premia?

Seongman Moon

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: Fama’s (1984) volatility relations show that the risk premium in foreign exchange markets is more volatile than, and is negatively correlated with the expected rate of depreciation. This paper studies these relations from the perspective of goods markets frictions. Using a sticky-price general equilibrium model, we show that near-random walk behaviors of both exchange rates and consumption, in response to monetary shocks, can be derived endogenously. Based on this approach, the paper provides quantitative results that might explain the forward premium anomaly, which is one of the most important puzzles in international finance.

Keywords: Foreign; exchange; risk; premium; Forward; premium; anomaly; Random; walk; behaviors; Staggered; price; setting; Interest-sensitive; money; demand; Monetary; shocks (search for similar items in EconPapers)
Date: 2007-05
References: Add references at CitEc
Citations:

Downloads: (external link)
https://e-archivo.uc3m.es/rest/api/core/bitstreams ... cf07391dee72/content (application/pdf)

Related works:
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:cte:werepe:we074924

Access Statistics for this paper

More papers in UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía
Bibliographic data for series maintained by Ana Poveda ().