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"We offer an explanation for the forward premium puzzle in foreign exchange markets based upon investor overconfidence. In the model, overconfident individuals overreact to their information about future inflation, which causes greater overshooting in the forward rate than in the spot rate. Thus, when agents observe a signal of higher future inflation, the consequent rise in the forward premium predicts a subsequent downward correction of the spot rate. The model can explain the magnitude of the forward premium bias and several other stylized facts related to the joint behavior of forward and spot exchange rates. Our approach is also consistent with the availability of profitable carry trade strategies"--National Bureau of Economic Research web site.
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Investor overconfidence and the forward premium puzzle
2010, National Bureau of Economic Research
Electronic resource
in English
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Edition Notes
Title from PDF file as viewed on 4/8/2010.
Includes bibliographical references.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.
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September 25, 2020 | Edited by MARC Bot | import existing book |
January 7, 2011 | Created by ImportBot | initial import |