Discussion Paper Details

Please find the details for DP6399 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Understanding the Forward Premium Puzzle: A Microstructure Approach

Author(s): Craig Burnside, Martin Eichenbaum and Sérgio Rebelo

Publication Date: July 2007

Keyword(s): Exchange rates, microstructure and Uncovered interest parity

Programme Area(s): International Macroeconomics

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.

For full details and related downloads, please visit:

Bibliographic Reference

Burnside, C, Eichenbaum, M and Rebelo, S. 2007. 'Understanding the Forward Premium Puzzle: A Microstructure Approach'. London, Centre for Economic Policy Research.