scholarly journals The Currency Carry Trade: Selection Skill or Behavioral Bias

2016 ◽  
Vol 9 (9) ◽  
pp. 176
Author(s):  
Ian Hudson
Keyword(s):  
Interest Rate ◽  
Efficient Market Hypothesis ◽  
Arbitrage Pricing Theory ◽  
Carry Trade ◽  
Interest Rate Parity ◽  
Forward Premium ◽  
Investment Returns ◽  
Pricing Theory ◽  
Premium Puzzle

<p>Many attempts have been undertaken to solve the forward premium puzzle with little to no success. The global currency market is considered the most information efficient and transparent of all financial markets since it demonstrates a balance between over and under-reaction to information with remarkable consistency. The Efficient Market Hypothesis espouses investors cannot systematically outperform a benchmark since all investors have access to the same information. Therefore, the expected long-term rate of return for currencies is essentially zero. The Arbitrage Pricing Theory asserts investment returns are random. As such, traders cannot avail themselves of mispriced currencies. The assertion of Uncovered Interest Rate Parity is that bi-national interest rate variance is equal to the expected differential in exchange rates. This paper asks the following questions: does alpha persistence exist in currency carry trade funds or are its excess returns merely a collection of behavioral biases?</p>

scholarly journals Capital Market Theories: Market Efficiency Versus Investor Prospects

2012 ◽  
Vol 11 (8) ◽  
pp. 849
Author(s):  
Kathleen Hodnett ◽  
Heng-Hsing Hsieh
Keyword(s):  
Market Efficiency ◽  
Behavioral Finance ◽  
Capital Market ◽  
Asset Allocation ◽  
Efficient Market Hypothesis ◽  
Capital Asset Pricing ◽  
Arbitrage Pricing Theory ◽  
Market Portfolio ◽  
Pricing Theory

This paper reviews the development of capital market theories based on the assumption of capital market efficiency, which includes the efficient market hypothesis (EMH), modern portfolio theory (MPT), the capital asset pricing model (CAPM), the implications of MPT in asset allocation decisions, criticisms regarding the market portfolio and the development of the arbitrage pricing theory (APT). An alternative school of thought proposes that investors are irrational and that their trading behaviors are driven by psychological biases such as greed and fear. Prospect theory and the role of behavioral finance that describe investment decisions in imperfect capital markets are presented to contrast the Utopian assumption of perfect market efficiency. The paper concludes with the argument of Hirshleifer (2001) that heuristics are shared by investors and asset prices may not reflect their long-term intrinsic values as indicated by efficient capital market theories.

A HIDDEN MARKOV APPROACH TO THE FORWARD PREMIUM PUZZLE

2006 ◽  
Vol 09 (07) ◽  
pp. 1009-1020 ◽  
Author(s):  
ROBERT J. ELLIOTT ◽  
BING HAN
Keyword(s):  
Interest Rate ◽  
Hidden Markov ◽  
Forward Premium Puzzle ◽  
Interest Rate Parity ◽  
Full Account ◽  
Forward Premium ◽  
Hidden Markov Process ◽  
Three State Model ◽  
Premium Puzzle ◽  
State Models

A Hidden Markov Chain (HMC) is applied to study the forward premium puzzle. The weekly quotient of the interest rate differential divided by the log exchange rate change is modeled as a Hidden Markov process. Compared with existing standard approaches, the Hidden Markov approach allows a detailed analysis of the puzzle on a day-to-day basis while taking into full account the presence of noise in the observations. Two and three state models are investigated. A three-state HMC model performs better than two-state models. Application of the three-state model reveals that the above quotient is mostly zero, and hence leads to the rejection of the uncovered interest rate parity hypothesis.

Penggunaan Arbitrage Pricing Theory Untuk Menganalisis Return Saham Syariah

2017 ◽  
Vol 9 (1) ◽  
pp. 68-84
Author(s):  
Gusni Gusni ◽  
Suskim Riantani
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Stock Return ◽  
Sampling Method ◽  
Stock Exchange ◽  
Factor Loading ◽  
Arbitrage Pricing Theory ◽  
Arbitrage Pricing ◽  
Variable Model ◽  
Pricing Theory

Arbitrage Pricing Theory (APT) is one of model that can be used to quantify the risk for investors in order to produce capital gain.There are two empirical models are used in implement the APT: the factor loading model (FLM) and the macro variable model (MVM). Model used in this research was MVM as used by Chen, Roll dan Ross (1986), and Chen, Hsieh dan Jordan (1997). The purpose of this study is to capture the application of APT in Jakarta Islamic Index (JII) using macroeconomic variables (inflation, exchange rate, and interest rate) as the determinants of Syariah stock return and found macro economics variables having powerful effect to the Syariah stock return. To achieve the objectives of this study, a total of 11 listed syariah firms of Jakarta Islamic Index (JII) in Indonesia Stock Exchange were selected by using purposive sampling method from the period of 2009 to 2014. Multiple linear regression has been conducted to capture the application of APT in analized determinants of Syariah stock return. The result shows that only interest rate has effect to the syariah (JII) stock return. Meanwhile inflation and exchange rate have no effect to the syariah stock return. Emperical results clearly indicate that application of APT in justifying returns on Syariah stocks is still weak. Keywords: Arbitrage Pricing Theory, Exchange Rate, Inflation, Interest Rate, Stock Return

scholarly journals Rare Disasters and Exchange Rates *

2015 ◽  
Vol 131 (1) ◽  
pp. 1-52 ◽  
Author(s):  
Emmanuel Farhi ◽  
Xavier Gabaix
Keyword(s):  
Exchange Rates ◽  
Interest Rates ◽  
Asset Markets ◽  
Carry Trade ◽  
Currency Options ◽  
Forward Premium ◽  
Rare Disasters ◽  
Excess Volatility ◽  
Premium Puzzle ◽  
Exchange Rate Disconnect

Abstract We propose a new model of exchange rates, based on the hypothesis that the possibility of rare but extreme disasters is an important determinant of risk premia in asset markets. The probability of world disasters as well as each country’s exposure to these events is time-varying. This creates joint fluctuations in exchange rates, interest rates, options, and stock markets. The model accounts for a series of major puzzles in exchange rates: excess volatility and exchange rate disconnect, forward premium puzzle and large excess returns of the carry trade, and comovements between stocks and exchange rates. It also makes empirically successful signature predictions regarding the link between exchange rates and telltale signs of disaster risk in currency options.

scholarly journals New Evidence on the Forward Premium Puzzle

2016 ◽  
Vol 51 (3) ◽  
pp. 875-897 ◽  
Author(s):  
Jacob Boudoukh ◽  
Matthew Richardson ◽  
Robert F. Whitelaw
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Purchasing Power Parity ◽  
Power Parity ◽  
Forward Premium Anomaly ◽  
Forward Premium ◽  
Premium Puzzle ◽  
The Interest Rate ◽  
Exchange Rate Changes ◽  
Interest Rate Differentials

AbstractThe forward premium anomaly (exchange rate changes are negatively related to interest rate differentials) is one of the most robust puzzles in financial economics. We recast the underlying parity relation in terms of lagged forward interest rate differentials, documenting a reversal of the anomalous sign on the coefficient in the traditional specification. We show that this novel evidence is consistent with recent empirical models of exchange rates that imply exchange rate changes depend on two key variables: the interest rate differential and the magnitude of the deviation of the current exchange rate from that implied by purchasing power parity.

Essays on the forward premium bias

2020 ◽  
Author(s):  
Νικόλαος Ηλίας
Keyword(s):  
Carry Trade ◽  
Forward Premium Puzzle ◽  
Forward Premium ◽  
Premium Puzzle

O στόχος αυτής της διδακτορικής διατριβής είναι να παράσχει νέες πληροφορίες για την εξήγηση του παζλ του προθεσμιακού ασφαλίστρου (forward premium puzzle), και την ικανότητά μας στην πρόβλεψη των συναλλαγματικών ισοτιμιών. Μετά από μια σύντομη ανασκόπηση της καλυμμένης, ακάλυπτης ισοτιμίας επιτοκίου (CIRP, UIRP) και μερικές από τις πιο δημοφιλείς εξηγήσεις του παζλ του προθεσμιακού ασφαλίστρου, η διατριβή παρουσιάζει τρία δοκίμια για να ρίξει φως στο παραπάνω παζλ. Η διατριβή παρέχει πολλά χρήσιμα αποτελέσματα για ακαδημαϊκούς και επαγγελματίες. Πρώτον, δείχνει ότι ένα μοντέλο παλινδρόμησης της διαφοράς των επιτοκίων μεταξύ της εγχώριας και της ξένης χώρας, το οποίο προσαρμόζεται για την επίδραση του ασφαλίστρου κινδύνου συναλλαγματικής ισοτιμίας, μπορεί εύλογα να προβλέψει τις μελλοντικές μεταβολές στις συναλλαγματικές ισοτιμίες. Δεύτερον, αποδεικνύει ότι το προθεσμιακό ασφάλιστρο, που ενσωματώνεται στη διαφορά των επιτοκίων, μπορεί με συνέπεια να εξηγεί το μεγαλύτερο μέρος της μεροληψίας της διαφοράς των επιτοκίων και της απόδοσης χρονικής περιόδου για την πρόβλεψη μελλοντικών αλλαγών στη συναλλαγματική ισοτιμία. Τρίτον, δείχνει ότι η στρατηγική μεταφοράς συναλλάγματος (currency carry trade strategy), που περιλαμβάνει το δανεισμό σε νόμισμα με χαμηλό επιτόκιο προκειμένου να αγοραστεί ένα νόμισμα με υψηλό επιτόκιο, μπορεί να εξηγήσει με συνέπεια το παζλ του προθεσμιακού ασφαλίστρου, μόνο όταν η διαφορά των επιτοκίων είναι θετική, και άρα συνδέεται με στρατηγική μεταφοράς συναλλάγματος σε δολάρια Αμερικής.

Sign in / Sign up

Export Citation Format

Share Document