Peso Problems and Heterogeneous Trading: Evidence From Excess Returns in Foreign Exchange and Euromarkets / Martin D. Evans, Karen K. Lewis.

Format:

Book

Author/Creator:

Evans, Martin D.

Contributor:

National Bureau of Economic Research.

Lewis, Karen K.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4003.

NBER working paper series no. w4003

Language:

English

Subjects (All):

Foreign exchange.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Peso Problems and Heterogeneous Trading

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1992.

Cambridge, Mass. : National Bureau of Economic Research, 1992.

Summary:

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.

Notes:

Print version record

February 1992.

Includes bibliographical references.