TY  - JOUR
AU  - Evans,Martin D.
AU  - Lewis,Karen K.
TI  - Peso Problems and Heterogeneous Trading: Evidence From Excess Returns in Foreign Exchange and Euromarkets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4003
PY  - 1992
Y2  - February 1992
UR  - http://www.nber.org/papers/w4003
L1  - http://www.nber.org/papers/w4003.pdf
N1  - Author contact info:
Martin Evans
Department of Economics
Georgetown University
Washington, DC  20057
Tel: 202-687-1570
E-Mail: evansm1@georgetown.edu

Karen K. Lewis
Department of Finance, Wharton School
2300 SHDH
University of Pennsylvania
Philadelphia, PA 19104-6367
Tel: 215/898-7637
Fax: 215/898-6200
E-Mail: lewisk@wharton.upenn.edu
AB  - Theoretical and empirical studies have treated excess returns as processes with time-varying but temporary disturbances. By contrast, empirical evidence indicates that the behavior of asset price levels can be well-approximated by processes with some permanent disturbances. These two observations restrict the relationship between the levels of asset prices and the excess returns they generate. In this paper, we begin by testing these restrictions for foreign exchange and bond returns. Surprisingly, we reject these restrictions for some returns, implying that excess returns contain some permanent shocks. We then evaluate the possible reasons for these results. This behavior appears inconsistent with conventional models of the risk premia. On the other hand, this behavior could arise from the presence of some traders in the market who have "regressive expectations" or from anticipated shifts in the distribution of asset prices inducing a "peso problem". We test and reject a simple model implied by a steady-state presence of traders with regressive expectations. However, we cannot distinguish between a model where the effects of these traders vary over time or where a peso problem exists or both.
ER  -