Affine Models of Currency Pricing

David Backus, Silverio Foresi and Chris Telmer ()

No 5623, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Perhaps the most puzzling feature of currency prices is the tendency for high interest rate currencies to appreciate, when the expectations hypothesis suggests the reverse. Some have attributed this forward premium anomaly to a time-varying risk premium, but theory has been largely unsuccessful in producing a risk premium with the requisite properties. We characterize the risk premium in a general arbitrage-free setting and describe the features a theory must have to account for the anomaly. In affine models, the anomaly requires either that state variables have asymmetric effects on state prices in different currencies or that we abandon the common requirement that interest rates be strictly positive.

JEL-codes: F31 G12 (search for similar items in EconPapers)
Date: 1996-06
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Published as Journal of Finance, Volume 56: Issue 1 February 2001

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Working Paper: Affine Models of Currency Pricing (1996)
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