English, Article, Journal or magazine article edition: Can a Habit Formation Model really explain the forward premium anomaly? Costa, Carlos Eugênio da; Vasconcelos, Jivago X.

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Bookmark: http://trove.nla.gov.au/version/80664
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Can a Habit Formation Model really explain the forward premium anomaly?
Author
  • Costa, Carlos Eugênio da
  • Vasconcelos, Jivago X.
Physical Description
  • preprint
Notes
  • Verdelhan (2009) shows that if one is to explain the foreign exchange forwardpremium behavior using Campbell and Cochrane (1999)'s habit formation modelone 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 andCochrane's framework under implausible parameters speci cations given that theprice-consumption ratio diverges in almost all parameters sets. We, then, adoptVerdelhan's shortcut of xing the sensivity function (st) at its steady state level toattain a nite value for the price-consumption ratio and release it in the simulationstage to ensure pro-cyclical risk free rates. Beyond the potential inconsistenciesthat 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.
  • RePEc:fgv:epgewp:692
Language
  • English
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