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A Habit-based explanation of the exchange rate risk premium

Verdelhan, Adrien - ;

This paper presents a model that reproduces the uncovered interest rate parity puzzle. Investors have preferences with external habits. Countercyclical risk premia and procyclical real interest rates arise endogenously. During bad times at home, when domestic consumption is close to the habit level, the representative investor is very risk averse. When the domestic investor is more risk averse than her foreign counterpart, the exchange rate is closely tied to domestic consumption growth shocks. The domestic investor therefore expects a positive currency excess return. Because interest rates are low in bad times, expected currency excess returns increase with interest rate differentials.Printed journal


Ketersediaan

Call NumberLocationAvailable
PSB lt.dasar - Pascasarjana1
Penerbit: American Finance Association
Edisi-
SubjekEconomic models
Foreign exchange rate risk
Risk aversion
studies
Rates of return
Risk premiums
Interest rate parity theorem
ISBN/ISSN221082
Klasifikasi-
Deskripsi Fisik-
Info Detail Spesifik-
Other Version/RelatedTidak tersedia versi lain
Lampiran BerkasTidak Ada Data

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