Affine Models of Currency Pricing /
Backus, David.
Affine Models of Currency Pricing / David Backus, Silverio Foresi, Chris Telmer. - Cambridge, Mass. National Bureau of Economic Research 1996. - 1 online resource: illustrations (black and white); - NBER working paper series no. w5623 . - Working Paper Series (National Bureau of Economic Research) no. w5623. .
June 1996.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Affine Models of Currency Pricing / David Backus, Silverio Foresi, Chris Telmer. - Cambridge, Mass. National Bureau of Economic Research 1996. - 1 online resource: illustrations (black and white); - NBER working paper series no. w5623 . - Working Paper Series (National Bureau of Economic Research) no. w5623. .
June 1996.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.