Browsing Department of Finance (FI) by Author "Wagner, Christian"
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Sarno, Lucio; Schneider, Poul; Wagner, Christian (, 2011)[More information][Less information]
Abstract: We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, de¯ned as the tendency of high-interest rate currencies to ap- preciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates. Estimating a±ne (multi-currency) term structure models reveals a noticeable tradeo® between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global a±ne model generate unbiased predictions for cur- rency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals. URI: http://hdl.handle.net/10398/9098 Files in this item: 1
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Wagner, Christian (, 2012)[More information][Less information]
Abstract: In this paper, we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range. We show that exchange rate returns comprise a time-varying risk-premium and that uncovered interest parity (UIP) holds in a speculative sense. The often-cited `forward bias puzzle' originates from the omission of the risk-premium in standard UIP tests. Consistent with its popularity among market professionals, the carry-trade strategy can be rationalized as it systematically collects risk-premia and generates economic value when applied in multi-currency portfolios. URI: http://hdl.handle.net/10398/9099 Files in this item: 1
Now showing items 1-2 of 2