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

TY - JOUR

T1 - Real exchange rate persistence and the excess return puzzle

T2 - The case of Switzerland versus the US

AU - Juselius, Katarina

AU - Assenmacher, Katrin

PY - 2017/9/1

Y1 - 2017/9/1

N2 - 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".

AB - 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".

U2 - 10.1002/jae.2562

DO - 10.1002/jae.2562

M3 - Journal article

AN - SCOPUS:85013664551

SN - 0883-7252

VL - 32

SP - 1145

EP - 1155

JO - Journal of Applied Econometrics

JF - Journal of Applied Econometrics

IS - 6

ER -