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PRELIMINARY DRAFT DO NOT CITE WITHOUT PERMISSION (Almost) A Quarter Century of Currency Expectations Data: Interest Rate Parity and the Risk Premium

By Menzie D. Chinn

Abstract

Abstract: I re-examine whether the presence of an exchange risk premium or biased expectations explains why the forward premium fails to predict exchange rates changes. The re-examination is undertaken using survey-based data on exchange rate expectations over a long sample extending from August 1986 to October 2009 period. I find that on a time series basis, (i) forward rate bias persists into the most recent period, (ii) the forward rate better predicts expected depreciation, suggesting uncovered interest parity holds, (iii) these patterns persist in panel regressions, and (iv) survey based expectations are biased predictors of exchange rate changes, The implication is that the standard measure of the exchange risk premium, identified using the rational expectations hypothesis, provides misleading inferences

Topics: forward rate unbiasedness
Year: 2012
OAI identifier: oai:CiteSeerX.psu:10.1.1.363.1991
Provided by: CiteSeerX
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