Rational inattention: a solution to the forward discount puzzle
Gespeichert in:
| Beteiligte Personen: | , |
|---|---|
| Format: | Buch |
| Sprache: | Englisch |
| Veröffentlicht: |
Cambridge, Mass.
National Bureau of Economic Research
2005
|
| Schriftenreihe: | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series
11633 |
| Schlagwörter: | |
| Links: | http://papers.nber.org/papers/w11633.pdf |
| Abstract: | "The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international finance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benefit from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks"--National Bureau of Economic Research web site. |
| Umfang: | 34, [4] S. graph. Darst. |
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| 490 | 1 | |a National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |v 11633 | |
| 520 | 3 | |a "The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international finance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benefit from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks"--National Bureau of Economic Research web site. | |
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| 650 | 4 | |a Foreign exchange rates |x Econometric models | |
| 650 | 4 | |a International finance |x Econometric models | |
| 700 | 1 | |a Van Wincoop, Eric |e Verfasser |0 (DE-588)124086799 |4 aut | |
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| illustrated | Illustrated |
| indexdate | 2024-12-20T12:33:46Z |
| institution | BVB |
| language | English |
| oai_aleph_id | oai:aleph.bib-bvb.de:BVB01-014659756 |
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| physical | 34, [4] S. graph. Darst. |
| publishDate | 2005 |
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| publisher | National Bureau of Economic Research |
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| series | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |
| series2 | National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series |
| spelling | Bacchetta, Philippe 1960- Verfasser (DE-588)12418538X aut Rational inattention a solution to the forward discount puzzle Philippe Bacchetta ; Eric van Wincoop Cambridge, Mass. National Bureau of Economic Research 2005 34, [4] S. graph. Darst. txt rdacontent n rdamedia nc rdacarrier National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 11633 "The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international finance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benefit from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks"--National Bureau of Economic Research web site. Ökonometrisches Modell Foreign exchange rates Econometric models International finance Econometric models Van Wincoop, Eric Verfasser (DE-588)124086799 aut Erscheint auch als Internetausgabe National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series 11633 (DE-604)BV002801238 11633 http://papers.nber.org/papers/w11633.pdf kostenfrei Volltext |
| spellingShingle | Bacchetta, Philippe 1960- Van Wincoop, Eric Rational inattention a solution to the forward discount puzzle National Bureau of Economic Research <Cambridge, Mass.>: NBER working paper series Ökonometrisches Modell Foreign exchange rates Econometric models International finance Econometric models |
| title | Rational inattention a solution to the forward discount puzzle |
| title_auth | Rational inattention a solution to the forward discount puzzle |
| title_exact_search | Rational inattention a solution to the forward discount puzzle |
| title_full | Rational inattention a solution to the forward discount puzzle Philippe Bacchetta ; Eric van Wincoop |
| title_fullStr | Rational inattention a solution to the forward discount puzzle Philippe Bacchetta ; Eric van Wincoop |
| title_full_unstemmed | Rational inattention a solution to the forward discount puzzle Philippe Bacchetta ; Eric van Wincoop |
| title_short | Rational inattention |
| title_sort | rational inattention a solution to the forward discount puzzle |
| title_sub | a solution to the forward discount puzzle |
| topic | Ökonometrisches Modell Foreign exchange rates Econometric models International finance Econometric models |
| topic_facet | Ökonometrisches Modell Foreign exchange rates Econometric models International finance Econometric models |
| url | http://papers.nber.org/papers/w11633.pdf |
| volume_link | (DE-604)BV002801238 |
| work_keys_str_mv | AT bacchettaphilippe rationalinattentionasolutiontotheforwarddiscountpuzzle AT vanwincooperic rationalinattentionasolutiontotheforwarddiscountpuzzle |