Journal of Monetary Economics volume 60, issue 4, P474-491 2013 DOI: 10.1016/j.jmoneco.2013.04.001 View full text
Jianfeng Yu

Abstract: This paper presents a sentiment-based explanation of the forward premium puzzle. Agents over-or underestimate the growth rate of the economy. All else equal, when perceived domestic growth is higher than perceived foreign growth, the domestic interest rate is higher than the foreign interest rate. At the same time, an econometrician would expect an increase in the home currency value. Together, the model with investor misperception can account for the forward premium puzzle. In addition, it helps explain the l…

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