Published in:Economic Research Initiatives at Duke (ERID) Working Paper ; No. 33
Extent:
1 Online-Ressource (57 p)
Language:
English
Origination:
Footnote:
In: Economic Research Initiatives at Duke (ERID) Working Paper No. 33
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 1, 2010 erstellt
Description:
High-interest-rate currencies tend to appreciate in the future relative to low-interest-rate currencies instead of depreciating as uncovered-interest-parity (UIP) predicts. I construct a model of exchange-rate determination in which ambiguity-averse agents face a dynamic filtering problem featuring signals of uncertain precision. Solving a max-min problem, agents act upon a worst-case signal precision and systematically underestimate the hidden state that controls payoffs. Thus, on average, agents next periods perceive positive innovations, which generates an upward re-evaluation of the strategy's profitability and implies ex-post departures from UIP. The model also produces predictable expectational errors, ex-post profitability and negative skewness of currency speculation payoffs