Results 1  10
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192
Predictive regressions
 Journal of Financial Economics
, 1999
"... When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's "nitesample properties, derived here, can depart substantially from the standard regression setting. Bayesian ..."
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Cited by 257 (16 self)
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When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's "nitesample properties, derived here, can depart substantially from the standard regression setting. Bayesian posterior distributions for the regression parameters are obtained under speci"cations that di!er with respect to (i) prior beliefs about the autocorrelation of the regressor and (ii) whether the initial observation of the regressor is speci"ed as "xed or stochastic. The posteriors di!er across such speci"cations, and asset allocations in the presence of estimation risk exhibit sensitivity to those
Simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets
, 2002
"... ..."
HabitBased Explanation of the Exchange Rate Risk Premium
, 2005
"... This paper presents a fully rational general equilibrium model that produces a timevarying exchange rate risk premium and solves the uncovered interest rate parity (U.I.P) puzzle. In this twocountry model, agents are characterized by slowmoving external habit preferences derived from Campbell & Co ..."
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Cited by 35 (5 self)
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This paper presents a fully rational general equilibrium model that produces a timevarying exchange rate risk premium and solves the uncovered interest rate parity (U.I.P) puzzle. In this twocountry model, agents are characterized by slowmoving external habit preferences derived from Campbell & Cochrane (1999). Endowment shocks are i.i.d and real riskfree rates are timevarying. Agents can trade across countries, but when a unit is shipped, only a fraction of the good arrives to the foreign shore. The model gives a rationale for the U.I.P puzzle: the domestic investor receives a positive exchange rate risk premium when she is more riskaverse than her foreign counterpart. Times of high riskaversion correspond to low interest rates. Thus, the domestic investor receives a positive risk premium when interest rates are lower at home than abroad. The model is both simulated and estimated. The simulation recovers the usual negative coefficient between exchange rate variations and interest rate differentials. When the iceberglike trade cost is taken into account, the exchange rate variance produced is in line with its empirical counterpart. A nonlinear estimation of the model using consumption data leads to reasonable parameters when pricing the foreign excess returns of an American investor.
Term Premiums and Default Premiums in Money Markets
 Journal of Financial Economics
, 1986
"... There are timevarying term and default premiums in the expected returns on money market securities. Default premiums decline with maturity and tend to be higher during recessions. Term premiums tend to increase with maturity during good times, but humps and inversions in the term structure of expec ..."
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Cited by 32 (0 self)
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There are timevarying term and default premiums in the expected returns on money market securities. Default premiums decline with maturity and tend to be higher during recessions. Term premiums tend to increase with maturity during good times, but humps and inversions in the term structure of expected returns are common during recessions. Treasury bills produce positive average term premiums for the overall sample, but average term premiums for privateissuer securities are close to 0.0. A general conclusion is that variation in forward rates is primarily variation in current expected returns rather than in forecasts of changes in interest rates. 1.
Risk, Uncertainty, and Exchange Rates
 Journal of Monetary Economics
, 1989
"... This paper explores a new direction for empirical models of exchange rate determination. The motivation arises from two well documented facts, the failure of loglinear empirical exchange rate models of the 1970's and the variability of risk premiums in the forward market. Rational maximizing models ..."
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Cited by 29 (2 self)
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This paper explores a new direction for empirical models of exchange rate determination. The motivation arises from two well documented facts, the failure of loglinear empirical exchange rate models of the 1970's and the variability of risk premiums in the forward market. Rational maximizing models of economic behavior imply that changes in the conditional variances of exogenous processes, such as future monetary policies, future government spending, and future rates of income growth, can have a significant effect on risk premiums in the foreign exchange market and can induce conditional volatility of spot exchange rates. I examine theoretically how changes in these exogenous conditional variances affect the level of the current exchange rate, and I attempt to quantify the extent that this channel explains exchange rate volatility using autoregressive conditional heteroscedastic models.
Heterogeneous Expectations And Tests Of Efficiency In The Yen/dollar Forward Exchange Rate Market
, 1998
"... This paper examines the efficiency of the forward yen/dollar market using micro survey data. Conventional tests of unbiasedness do not correspond directly to the zeroprofit condition. Instead, we use the survey data to calculate potential profits of individual forecasters based on a natural trading ..."
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Cited by 29 (0 self)
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This paper examines the efficiency of the forward yen/dollar market using micro survey data. Conventional tests of unbiasedness do not correspond directly to the zeroprofit condition. Instead, we use the survey data to calculate potential profits of individual forecasters based on a natural trading rule. We find that although the survey data are not the best predictor of future spot rates in terms of typical mean square forecast error criteria, the survey data can be used to obtain on average positive profits. However, these profits are small and highly variable. Similar results are found when we examine profits generated by a trading rule using regression forecasts. The profits are found to be correlated with risk type variables but not other available information. Key Words: Foreign exchange rate; Expectations; Forward rate; and Efficient markets. JEL classification: F31, G14, G15 Acknowledgment: We thank J. Frankel, A. Timmermann, A. Melino, an anonymous referee and seminar partici...
Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise
 Economic Journal
, 1998
"... We examine the ability of the standard intertemporal asset pricing model and a model of noise trading to explain why the forward premium predicts the future depreciation with the `wrong ' sign. We ¯nd that the intertemporal asset pricing model is unable to predict risk premia with the correct sign t ..."
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Cited by 27 (0 self)
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We examine the ability of the standard intertemporal asset pricing model and a model of noise trading to explain why the forward premium predicts the future depreciation with the `wrong ' sign. We ¯nd that the intertemporal asset pricing model is unable to predict risk premia with the correct sign to be consistent with the data. The noisetrader model, while highly stylized, receives fragmentary support from empirical research on survey expectations.
An exploration of the forward premium puzzle in currency markets
 Review of Financial Studies
, 1997
"... A standard empirical finding is that expected changes in exchange rates and interest rate differentials across countries are negatively related, implying that uncovered interest rate parity is violated in the data. This article provides new empirical evidence that suggests that violations of uncover ..."
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Cited by 25 (0 self)
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A standard empirical finding is that expected changes in exchange rates and interest rate differentials across countries are negatively related, implying that uncovered interest rate parity is violated in the data. This article provides new empirical evidence that suggests that violations of uncovered interest rate parity, and its economic implications, depend on the sign of the interest rate differential. A framework related to term structure models is developed to account for the puzzling relationship between expected changes in exchange rates and interest rate differentials. Estimation results suggest that a particular term structure model can account for the puzzling empirical evidence. According to the hypothesis of uncovered interest rate parity, expected changes in the nominal exchange rate should be positively related to the difference in the nominal interest rate across countries. In particular, this hypothesis implies that the slope coefficient from the regression of the change in exchange rate on the interest rate differential should be one. The forward premium puzzle refers to the welldocumented empirical finding that the slope coefficient from this regression is significantly negative [see Bilson (1981),
TimeVarying Risk, Interest Rates, and Exchange Rates in General Equilibrium
, 2005
"... Timevarying risk is the primary force driving nominal interest rate differentials on currencydenominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. We show that a general equilibrium monetary model with an endogenous source of risk vari ..."
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Cited by 25 (4 self)
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Timevarying risk is the primary force driving nominal interest rate differentials on currencydenominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. We show that a general equilibrium monetary model with an endogenous source of risk variation–a variable degree of asset market segmentation–can produce key features of actual interest rates and exchange rates. The endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, the benefit ofassetmarketparticipation varies, and that changes the fraction of agents participating. These effects lead the risk premium to vary systematically with the level of inflation. Our model produces variation in the risk premium even though the fundamental shocks have constant conditional variances.