NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The New Fama Puzzle

Matthieu Bussiere, Menzie D. Chinn, Laurent Ferrara, Jonas Heipertz

NBER Working Paper No. 24342
Issued in February 2018
NBER Program(s):International Finance and Macroeconomics

We re-examine the Fama (1984) puzzle – the finding that ex post depreciation and interest differentials are negatively correlated, contrary to what theory suggests – for eight advanced country exchange rates against the US dollar, over the period up to February 2016. The rejection of the joint hypothesis of uncovered interest parity (UIP) and rational expectations – sometimes called the unbiasedness hypothesis – still occurs, but with much less frequency. Strikingly, in contrast to earlier findings, the Fama regression coefficient is positive and large in the period after the global financial crisis. However, using survey based measures of exchange rate expectations, we find much greater evidence in favor of UIP. Hence, the main story for the switch in Fama coefficients in the wake of the global financial crisis is mostly a change in how expectations errors and interest differentials co-move, though the risk premium also plays a critical role for safe haven currencies (Japanese yen and Swiss franc).

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Document Object Identifier (DOI): 10.3386/w24342

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