NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Forward and Spot Exchange Rates in a Multi-currency World

Tarek A. Hassan, Rui C. Mano

NBER Working Paper No. 20294
Issued in July 2014, Revised in October 2018
NBER Program(s):The Asset Pricing Program, The International Finance and Macroeconomics Program, The International Trade and Investment Program

Separate literatures study violations of uncovered interest parity (UIP) 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 facts, and to estimate the joint restrictions they place on models of currency returns. Subject to standard assumptions on investors’ information sets, we find that the forward premium puzzle (FPP) and the “dollar trade” anomaly are intimately linked: both are driven almost exclusively by the cross-time component. By contrast, the “carry trade” anomaly is driven largely by cross-sectional violations of UIP. The simplest model the data do not reject features a cross-sectional asymmetry that makes some currencies pay permanently higher expected returns than others, and larger time series variation in expected returns on the US dollar than on other currencies. Importantly, conventional estimates of the FPP are not directly informative about expected returns, because they do not correct for uncertainty about future mean interest rates. Once we correct for this uncertainty, we never reject the null that investors expect high-interest-rate currencies to depreciate, not appreciate.

download in pdf format
   (784 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20294

Published: Tarek A Hassan & Rui C Mano, 2019. "Forward and Spot Exchange Rates in a Multi-Currency World*," The Quarterly Journal of Economics, vol 134(1), pages 397-450.

Users who downloaded this paper also downloaded* these:
Engel w21042 Exchange Rates, Interest Rates, and the Risk Premium
Bordo, Choudhri, Fazio, and MacDonald w20228 The Real Exchange Rate in the Long Run: Balassa-Samuelson Effects Reconsidered
Berka, Devereux, and Engel w20510 Real Exchange Rates and Sectoral Productivity in the Eurozone
Gabaix and Maggiori w19854 International Liquidity and Exchange Rate Dynamics
Aizenman, Cheung, and Ito w20386 International Reserves Before and After the Global Crisis: Is There No End to Hoarding?
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us