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

• Autor(a) principal: Vasconcelos, Jivago B. Ximenes de
• Data de Publicação: 2009
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Institucional do FGV (FGV Repositório Digital)
• Texto Completo: https://hdl.handle.net/10438/2714
• topic: Forward Premium Puzzle; Equity Premium Puzzle; Habit formation; Asset Pricing; Formação de Hábito; Economia; Modelo de precificação de ativos; Risco (Economia); Finanças - Modelos matemáticos

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 framework under implausible parameters speci cations given that the priceconsumption 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.