The Missing Risk Premium in Exchange Rates

Dahlquist, Magnus; Penasse, Julien

doi:10.2139/ssrn.2884890

Cited by 8 publications

(9 citation statements)

References 54 publications

(86 reference statements)

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“…Results in Dahlquist and Penasse (2016) and our model suggest that e t is a strong predictor of ∆s t . We extend this result by implementing the UIP-style regressions of section 2.3, but where the IRD is replaced by the RER.…”

Section: Additional Evidencementioning

confidence: 52%

“…In this brief review, we focus on papers that explore the role of the RER in this context. Our paper is most closely related to Dahlquist and Penasse (2016), who explore the PPP implications for UIP regressions. They impose PPP by iterating forward the relationship between nominal excess returns, real exchange rates, interest differentials, and inflation differential, a.k.a.…”

Section: Related Literaturementioning

confidence: 99%

“…This is a manifestation of the first property highlighted in section 2.4. In a univariate regression setting, Dahlquist and Penasse (2016) emphasize that e t is helpful in forecasting ∆s t+1 , that is, α s = 0. The second property holds as well: the IRD ∆ c t forecasts e t as long as it forecasts ∆s t .…”

Section: Error Correction Representationmentioning

confidence: 99%

“…where α e ≡ 1 + α s − α π , and we used φ e , which is equal to φ s under PPP, to emphasize the hypothetical case of φ e = 0. The expression in (4) highlights "the missing premium" of Dahlquist and Penasse (2016). The expressions in (5), (6) make the role of α f for forecasting obvious.…”

Section: Error Correction Representationmentioning

confidence: 99%

See 3 more Smart Citations

Multihorizon Currency Returns and Purchasing Power Parity

Chernov

Creal

2018

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Exposures of expected future depreciation rates to the current interest rate differential violate the UIP hypothesis in a distinctive pattern that is a non-monotonic function of horizon. Conversely, forward, or risk-adjusted expected depreciation rates are monotonic. We explain the two patterns jointly by incorporating the weak form of PPP, aka stationarity of the real exchange rate, into a joint model of the stochastic discount factor, the nominal exchange rate, inflation differential, domestic and foreign yield curves. Short-term departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern. Thus, the variance of the stochastic discount factor must be related to the real exchange rate deepening the exchange rate disconnect.

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Section: Additional Evidencementioning

confidence: 52%

Section: Related Literaturementioning

confidence: 99%

Section: Error Correction Representationmentioning

confidence: 99%

Section: Error Correction Representationmentioning

confidence: 99%

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Multihorizon Currency Returns and Purchasing Power Parity

Chernov

Creal

2018

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“…Engel (2016), Itshkoki and Mukhin (2017), and Vlachev (2017) propose explanations based on liquidity shocks. Chernov and Creal (2018) and Dahlquist and Penasse (2017) focus on the role of long-term real exchange rate adjustment. The forward guidance exchange rate puzzle and LSV puzzle have only been recently documented and no solution has been proposed yet.…”

Section: Introductionmentioning

confidence: 99%

Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment

Bacchetta

Wincoop

2019

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The objective of this paper is to show that the proposal by Froot and Thaler (1990) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all targeted moments related to these puzzles.

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Regime-dependent drivers of the EUR/CHF exchange rate

Kotlarz

Hanke

Stöckl

2023

Swiss J Economics Statistics

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We analyze drivers of the EUR/CHF exchange rate in different regimes between 2000 and 2020. Structural breaks between these subperiods are estimated in an integrated way together with the drivers that are relevant during these subperiods. Overall, the main drivers of the exchange rate include European equity and volatility indices, interest rate and term structure slope differentials, as well as monetary policy interventions. For the “peg period” September 2011–January 2015, in addition to the observed exchange rate we also analyze the drivers of the latent exchange rate that could have been observed in the absence of the peg. Interestingly, the SNB’s foreign currency investments became a significant driver of the EUR/CHF exchange rate only after the end of the peg period when there was no longer an officially communicated target rate.

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The Missing Risk Premium in Exchange Rates

Cited by 8 publications

References 54 publications

Multihorizon Currency Returns and Purchasing Power Parity

Multihorizon Currency Returns and Purchasing Power Parity

Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment

Regime-dependent drivers of the EUR/CHF exchange rate

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