Can a habit formation model really explain the Forward Premium Anomaly?

AUTOR(ES)
DATA DE PUBLICAÇÃO

07/08/2009

RESUMO

Verdelhan (2009) shows that if one is to explain the foreign ex- change forward premium behavior using Campbell and Cochrane (1999) s habit formation model one must specify it in such a way to generate pro-cyclical short term risk free rates. At the calibration procedure, we show that this is only possible in Campbell and Cochrane s frame- work under implausible parameters speci cations given that the price- consumption ratio diverges in almost all parameters sets. We, then, adopt Verdelhan s shortcut of xing the sensivity function (st) at its steady state level to attain a nite value for the price-consumption ratio and release it in the simulation stage to ensure pro-cyclical risk free rates. Beyond the potential inconsistencies that such procedure may generate, as suggested by Wachter (2006), with pro-cyclical risk free rates the model generates a downward sloped real yield curve, which is at odds with the data.

ASSUNTO(S)

forward premium puzzle equity premium puzzle habit formation asset pricing avaliação de ativos - modelo (capm) risco (economia) finanças - modelos matemáticos

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