TY  - JOUR
AU  - Burnside,Craig
AU  - Eichenbaum,Martin S.
AU  - Rebelo,Sergio
TI  - Understanding the Forward Premium Puzzle: A Microstructure Approach
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13278
PY  - 2007
Y2  - July 2007
UR  - http://www.nber.org/papers/w13278
L1  - http://www.nber.org/papers/w13278.pdf
N1  - Author contact info:
Craig Burnside
Department of Economics
Duke University
213 Social Sciences Building
Durham, NC 27708-0097
Tel: 919/660-1808
Fax: 919/684-8974
E-Mail: craig.burnside@duke.edu

Martin S. Eichenbaum
Department of Economics
Northwestern University
2003 Sheridan Road
Evanston, IL  60208
Tel: 847/491-8232
Fax: 847/491-7001
E-Mail: eich@northwestern.edu

Sergio Rebelo
Northwestern University
Kellogg School of Management
Department of Finance
Leverone Hall
Evanston, IL  60208-2001
Tel: 847/467-2329
Fax: 847/491-5719
E-Mail: s-rebelo@northwestern.edu
AB  - 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.
ER  -