The Forward Premium is Still a Puzzle
Craig Burnside ()
No 13129, NBER Working Papers from National Bureau of Economic Research, Inc
Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk," yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross-sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle.
JEL-codes: F31 G12 (search for similar items in EconPapers)
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