蝌蚪网 Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle
蝌蚪网 Journal: Macroeconomics
(pp. 33–65)
Abstract
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, negative skewness, and time-series momentum for currency speculation payoffs. (JEL D81, F31, G15)Citation
Ilut, Cosmin. 2012. "Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle." 蝌蚪网 Journal: Macroeconomics 4 (3): 33–65. DOI: 10.1257/mac.4.3.33Additional Materials
JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- F31 Foreign Exchange
- G15 International Financial Markets