The Forward Premium is Still a Puzzle

36 Pages Posted: 27 Jun 2007 Last revised: 26 Jul 2007

See all articles by A. Craig Burnside

A. Craig Burnside

Duke University - Department of Economics; University of Glasgow - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: May 2007

Abstract

Lustig and Verdelhan (2007) argue that the excess returns to borrowing US dollars and lending in foreign currency "compensate US investors for taking on more US consumption growth risk," yet the stochastic discount factor corresponding to their benchmark model is approximately uncorrelated with the returns they study. Hence, one cannot reject the null hypothesis that their model explains none of the cross-sectional variation of the expected returns. Given this finding, and other evidence, I argue that the forward premium puzzle remains a puzzle.

Suggested Citation

Burnside, Craig, The Forward Premium is Still a Puzzle (May 2007). NBER Working Paper No. w13129, Available at SSRN: https://ssrn.com/abstract=988939

Craig Burnside (Contact Author)

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