Revisiting the Forward Premium Anomaly Using Consumption Habits: A New Keynesian Model

25 Pages Posted: 6 Jun 2017

See all articles by Bianca De Paoli

Bianca De Paoli

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Jens Sondergaard

Capital Group International, Inc. - London Office

Date Written: July 2017

Abstract

This paper revisits the ability of consumption habits to resolve the forward premium anomaly as documented in the literature. We show that the favourable results obtained in an endowment setting crucially depend on having persistent dynamics in excess consumption, and do not appear to hold up in a production economy with nominal rigidities. The inability of such models to match equity and term premium has often been emphasized in the closed economy literature. Our findings suggest that this shortcoming also extends to open economy models and their ability to explain foreign exchange premia.

Suggested Citation

De Paoli, Bianca and S√łndergaard, Jens, Revisiting the Forward Premium Anomaly Using Consumption Habits: A New Keynesian Model (July 2017). Economica, Vol. 84, Issue 335, pp. 516-540, 2017. Available at SSRN: https://ssrn.com/abstract=2981361 or http://dx.doi.org/10.1111/ecca.12181

Bianca De Paoli (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Jens S√łndergaard

Capital Group International, Inc. - London Office ( email )

40 Grosvenor Place
London, England SW1X 7GG
United Kingdom

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