The bias for forward exchange rate and the risk premiuman explanation with a stochastic and dynamic general equilibrium model

Resumen

Forward exchange rate unbiassedness is rejected in test for international exchange markets. Such issue can be interpreted as evidence of a biased forward rate and/or time-varying risk premia. This paper proposes a stochastic general equilibrium model which generates substantial variability in the magnitude of predictable excess returns. Simulation exercises suggest that higher persistency in the monetary policy produces higher bias in the estimated slope coefficient in the regression of the change in the logarithm of the spot exchange rate on the forward premium. Also, our model suggest that the nature of the transmission between monetary shocks can explain the excess returns puzzle. Empirical evidence for the DM-USD rate that support our theoretical results is provided.