Real exchange rate persistence and the excess return puzzle: The case of Switzerland versus the US

Katarina Juselius, Katrin Assenmacher*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

22 Citations (Scopus)

Abstract

The PPP puzzle refers to the wide swings of nominal exchange rates around their long-run equilibrium values whereas the excess return puzzle represents the persistent deviation of the domestic-foreign interest rate differential from the expected change in the nominal exchange rate. Using the I(2) cointegrated VAR model, much of the excess return puzzle disappears when an uncertainty premium in the foreign exchange market, proxied by the persistent PPP gap, is introduced. Self-reinforcing feedback mechanisms seem to cause the persistence in the Swiss-US parity conditions. These results support imperfect knowledge based expectations rather than so-called "rational expectations".

Original languageEnglish
JournalJournal of Applied Econometrics
Volume32
Issue number6
Pages (from-to)1145–1155
Number of pages11
ISSN0883-7252
DOIs
Publication statusPublished - 2017

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