The Forward Premium Anomaly: Three Examples in Search of a Solution

32 Pages Posted: 11 Nov 2008

See all articles by David K. Backus

David K. Backus

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Chris Telmer

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: July 1994

Abstract

Perhaps the most puzzling feature of currency prices is the tendency for high interest rate currencies to appreciate, when the expectations hypothesis suggest the reverse. This forward premium anomaly has been attributed, by some, to a time-varying risk premium, but theory has yet to produce a risk premium with the requisite properties. We characterize the risk premium in a general theoretical framework and construct three examples that illustrate features a theoretical explanation of the anomaly is likely to have.

Keywords: forward and spot exchange rates, risk premium, pricing kernels, bond pricing

Suggested Citation

Backus, David K. and Foresi, Silverio and Telmer, Chris, The Forward Premium Anomaly: Three Examples in Search of a Solution (July 1994). NYU Working Paper No. FIN-94-006. Available at SSRN: https://ssrn.com/abstract=1298809

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Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group ( email )

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New York, NY 10005
United States
(212) 357-3508 (Phone)

Chris Telmer

affiliation not provided to SSRN

No Address Available

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