Date of Award
Spring 2014
Degree Name
Bachelor of Science
Major
Economics
First Advisor
Professor Josh R. Stillwagon
Abstract
This paper finds further evidence using a Cointegrated Vector Autoregression to support claims against the Uncovered Interest Rate Parity (UIP) ex post, referred to as the Forward Discount Anomaly (Fama, 1984). This anomaly suggests predictable profits simply from investing in a country with a higher interest rate. Potential explanations could be attributed to risk or deviations from the rational expectations hypothesis. UIP ex ante is tested using survey data. These results indicate a time-‐ varying risk premium. Further it is found that this premium is related to the gap between the exchange rate and Purchasing-‐Power-‐Parity value. Additionally it is determined that investor expectations are consistent with some behavioral rules; extrapolative and adaptive expectations drive deviations from PPP which transitions to regressive expectations when the gap is very large.
Recommended Citation
Russell, Samuel D., "A Piece of the Puzzle: Can behavioral insights help understand currency returns?". Senior Theses, Trinity College, Hartford, CT 2014.
Trinity College Digital Repository, https://digitalrepository.trincoll.edu/theses/370
Included in
Behavioral Economics Commons, Cognitive Psychology Commons, Econometrics Commons, Economic Theory Commons, Macroeconomics Commons, Other Economics Commons
Comments
Senior Thesis completed at Trinity College for the degree of Bachelor of Science in Economics.