Real exchange rate persistence and the excess return puzzle: The case of Switzerland versus the US

Publikation: Bidrag til tidsskriftTidsskriftartikelfagfællebedømt

The PPP puzzle refers to the wide swings of nominal exchange rates around their long-run equilibrium values whereas the excess return puzzle represents the persistent deviation of the domestic-foreign interest rate differential from the expected change in the nominal exchange rate. Using the I(2) cointegrated VAR model, much of the excess return puzzle disappears when an uncertainty premium in the foreign exchange market, proxied by the persistent PPP gap, is introduced. Self-reinforcing feedback mechanisms seem to cause the persistence in the Swiss-US parity conditions. These results support imperfect knowledge based expectations rather than so-called “rational expectations”.
OriginalsprogEngelsk
TidsskriftJournal of Applied Econometrics
Vol/bind32
Udgave nummer6
Sider (fra-til)1145–1155
Antal sider11
ISSN0883-7252
DOI
StatusUdgivet - 2017

ID: 177085610