TY  - JOUR
AU  - Backus,David
AU  - Foresi,Silverio
AU  - Telmer,Chris
TI  - Affine Models of Currency Pricing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5623
PY  - 1996
Y2  - June 1996
UR  - http://www.nber.org/papers/w5623
L1  - http://www.nber.org/papers/w5623.pdf
N1  - Author contact info:
David Backus
Stern School of Business
NYU
44 West 4th Street
New York, NY 10012-1126
Tel: 212/998-0873
Fax: 212/995-4221
E-Mail: dbackus@stern.nyu.edu

Silverio Foresi
Salomon Smith Barney
Emerging Markets Derivatives and
Structured Products
388 Greenwich Street
11th Floor
New York, NY  10013
AB  - 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.
ER  -