Premium
Revisiting the Forward Premium Anomaly Using Consumption Habits: A New Keynesian Model
Author(s) -
De Paoli Bianca,
Søndergaard Jens
Publication year - 2017
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12181
Subject(s) - economics , consumption (sociology) , equity premium puzzle , anomaly (physics) , new keynesian economics , endowment , foreign exchange , open economy , monetary economics , macroeconomics , risk premium , exchange rate , monetary policy , social science , philosophy , physics , epistemology , sociology , condensed matter physics
This paper revisits the ability of consumption habits to resolve the forward premium anomaly as documented in the literature. We show that the favourable results obtained in an endowment setting crucially depend on having persistent dynamics in excess consumption, and do not appear to hold up in a production economy with nominal rigidities. The inability of such models to match equity and term premium has often been emphasized in the closed economy literature. Our findings suggest that this shortcoming also extends to open economy models and their ability to explain foreign exchange premia.