2007-07-27 papers

on Market Microstructure

Issue of 2007‒07‒27
one paper chosen by
Thanos Verousis

Understanding the Forward Premium Puzzle: A Microstructure Approach By Burnside, A Craig; Eichenbaum, Martin; Rebelo, SÃÂÃÂÃÂÃÂ©rgio

Understanding the Forward Premium Puzzle: A Microstructure Approach

By:	Burnside, A Craig; Eichenbaum, Martin; Rebelo, SÃÂÃÂÃÂÃÂ©rgio
Abstract:	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.
Keywords:	Exchange rates; microstructure; Uncovered interest parity
JEL:	F31
Date:	2007–07
URL:	http://d.repec.org/n?u=RePEc:cpr:ceprdp:6399&r=mst

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