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dc.contributor.authorDavid, Backus-
dc.contributor.authorForesi, Silverio-
dc.contributor.authorTelmer, Chris-
dc.description.abstractPerhaps the most puzzling feature of currency prices is the tendency for high interest rate currencies to appreciate when the expectations hypothesis suggests the reverse. Some have attributed this forward premium anomaly to a time-varying risk premium but theory has been largely unsuccessful in producing a risk premium with the requisite properties. We characterize the risk premium in a general arbitrage-free setting and describe the features a theory must have to account for the anomaly. In affine models the anomaly requires either that state variables have asymmetric effects on state prices in different currencies or that we abandon the common requirement that interest rates be strictly positive.en
dc.subjectforward and spot exchange ratesen
dc.subjectrisk premiumsen
dc.subjectpricing kernelsen
dc.titleAffine Models of Currency Pricingen
dc.typeWorking Paperen
Appears in Collections:Finance Working Papers

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