Understanding the forward premium puzzle
Subtitle: a microstructure approach
By: Craig Burnside, Martin S. Eichenbaum, Sergio Rebelo.
Contributors: Eichenbaum, Martin S.; Rebelo, Sergio.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13278.; Working paper series (National Bureau of Economic Research) -- working paper no. 13278.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 28
Subjects: Currency question; International finance; Foreign exchange market
Description: High-interest-rate currencies tend to appreciate relative to low-interest-rate currencies. We argue that adverse-selection problems between participants in foreign exchange markets can account for this 'forward premium puzzle.' The key feature of our model is that the adverse selection problem facing market makers is worse when, based on public information, a currency is expected to appreciate.
Notes: "July 2007"

Includes bibliographical references (p. 18).

Also available in PDF from the NBER world wide web site (www.nber.org).