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

Posted: 22 Aug 1998

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

Carnegie Mellon University - David A. Tepper School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: Not Provided

Abstract

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. 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.

JEL Classification: F31, G12, G13

Suggested Citation

Backus, David K. and Foresi, Silverio and Telmer, Christopher I., The Forward Premium Anomaly: Three Examples in Search of a Solution (Not Provided ). Available at SSRN: https://ssrn.com/abstract=6932

David K. Backus

NYU Stern School of Business

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National Bureau of Economic Research (NBER)

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HOME PAGE: http://pages.stern.nyu.edu/~dbackus/

Silverio Foresi (Contact Author)

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

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

Christopher I. Telmer

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-8838 (Phone)
(412) 268-6837 (Fax)

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