Understanding the Forward Premium Puzzle: A Microstructure Approach

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.

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Year of publication:	2007-07
Authors:	Burnside, Craig ; Eichenbaum, Martin ; Rebelo, Sérgio
Institutions:	C.E.P.R. Discussion Papers
Subject:	Exchange rates \| microstructure \| Uncovered interest parity

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Extent:	application/pdf
Series:	CEPR Discussion Papers.
Type of publication:	Book / Working Paper
Notes:	Number 6399
Classification:	F31 - Foreign Exchange
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005067669