NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trends in Expected Returns in Currency and Bond Markets

Martin D. Evans, Karen K. Lewis

NBER Working Paper No. 4116
Issued in July 1992
NBER Program(s):   AP   IFM

Under conventional notions about rational expectations and market efficiency, expected returns differ from the actual expost returns by a forecast error that is uncorrelated with current information. In this paper, we describe how small departures from conventional notions of rational expectations and market efficiency can produce trends in excess returns. These trends are in addition to the trends typically found in the level of asset prices themselves. We report strong evidence for the presence of additional trends in excess foreign exchange and bond returns. We also estimate the additional trend component in excess returns on foreign exchange and find that it varied between -.8% and 1% for one month returns and between -6% and 8% for three month returns.

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Document Object Identifier (DOI): 10.3386/w4116

Published: European Economic Review, vol. 37, June 1993, pp. 1005-1020

 
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