Replication data for: Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle
Principal Investigator(s): View help for Principal Investigator(s) Cosmin Ilut
Version: View help for Version V1
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| files_aejm_2011_0075 | 10/12/2019 09:35:PM | ||
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text/plain | 14.6 KB | 10/12/2019 05:35:PM |
Project Citation:
Ilut, Cosmin. Replication data for: Ambiguity Aversion: Implications for the Uncovered Interest Rate Parity Puzzle. Nashville, TN: American Economic Association [publisher], 2012. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2019-10-12. https://doi.org/10.3886/E114250V1
Project Description
Summary:
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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)
Scope of Project
JEL Classification:
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D81 Criteria for Decision-Making under Risk and Uncertainty
F31 Foreign Exchange
G15 International Financial Markets
D81 Criteria for Decision-Making under Risk and Uncertainty
F31 Foreign Exchange
G15 International Financial Markets
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