Understanding the Forward Premium Puzzle: A Microstructure Approach

Craig Burnside, Martin Eichenbaum and Sergio Rebelo ()

No 13278, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: High-interest-rate currencies tend to appreciate relative to low-interest-rate currencies. We argue that adverse-selection problems between participants in foreign exchange markets can account for this 'forward premium puzzle.' The key feature of our model is that the adverse selection problem facing market makers is worse when, based on public information, a currency is expected to appreciate.

JEL-codes: E30 F31 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-upt
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published as Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2009. "Understanding the Forward Premium Puzzle: A Microstructure Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 127-54, July.

Downloads: (external link)
http://www.nber.org/papers/w13278.pdf (application/pdf)

Related works:
Journal Article: Understanding the Forward Premium Puzzle: A Microstructure Approach (2009)
Working Paper: Understanding the Forward Premium Puzzle: A Microstructure Approach (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:13278

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13278

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().