NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rui Mano

International Monetary Fund
Research Department
Open Economy Division
700 19th Street NW
Washington, D.C. 20431

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NBER Working Papers and Publications

July 2014Forward and Spot Exchange Rates in a Multi-currency World
with Tarek A. Hassan: w20294
Separate literatures study violations of uncovered interest parity using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate regression-based and portfolio-based anomalies, to test whether they are empirically distinct, and to estimate the joint restrictions they place on models of currency returns. We find that the forward premium puzzle (FPP) and the "dollar trade" anomaly are intimately linked. Both anomalies are almost exclusively driven by the cross-time component. By contrast, the "carry trade" anomaly is driven largely by the cross-currency component. The simplest model that the data do not reject features a highly persistent a...
 
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