Affine Term Structure Models and the Forward Premium Anomaly
Top Cited Papers
- 1 February 2001
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 56 (1) , 279-304
- https://doi.org/10.1111/0022-1082.00325
Abstract
One of the most puzzling features of currency prices is the forward premium anomaly: the tendency for high interest rate currencies to appreciate. We characterize the anomaly in the context of affine models of the term structure of interest rates. In affine models, the anomaly requires either that state variables have asymmetric effects on state prices in different currencies or that nominal interest rates take on negative values with positive probability. We find the quantitative properties of either alternative to have important shortcomings.Keywords
This publication has 25 references indexed in Scilit:
- The implications of first-order risk aversion for asset market risk premiumsJournal of Monetary Economics, 1997
- Equilibrium Valuation of Foreign Exchange ClaimsThe Journal of Finance, 1997
- An Exploration of the Forward Premium Puzzle in Currency MarketsThe Review of Financial Studies, 1997
- The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium PerspectiveThe Review of Financial Studies, 1996
- Nonparametric estimation of structural models for high-frequency currency market dataJournal of Econometrics, 1995
- Predicting excess returns in financial marketsEuropean Economic Review, 1995
- Accounting for Forward Rates in Markets for Foreign CurrencyThe Journal of Finance, 1993
- On biases in the measurement of foreign exchange risk premiumsJournal of International Money and Finance, 1993
- Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange MarketsThe Journal of Finance, 1992
- Pricing foreign currency options under stochastic interest ratesJournal of International Money and Finance, 1991