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Affine Models of Currency Pricing / David Backus, Silverio Foresi, Chris I. Telmer.
- Format:
- Book
- Author/Creator:
- Backus, David.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w5623.
- NBER working paper series no. w5623
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 1996.
- Summary:
- 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.
- Notes:
- Print version record
- June 1996.
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