Year: 2002
Type: report
Abstract: We propose a new explanation for the forward-premium and the delayed-overshooting puzzles.Both puzzles arise from a systematic under-reaction of short-term interest rate forecasts to current innovations.Accordingly, the forward premium is always a biased predictor of future depreciation; the bias can be so severe as to lead to negative coeffcients in the "Fama" regression; delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of under-reaction; lastly, for G-7 countries against the U.S., these puzzles can be rationalized for values of the model's parameters that match empirical estimates.
DOI: 10.3386/w9391
Authors: Pierre-Olivier Gourinchas, Aaron Tornell
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1559043050