Puzzling exchange rate dynamics and delayed portfolio adjustment (VOX)

The forward premium puzzle is one of many ways in which exchange rate behaviour can contradict economic theory. This column introduces a model in which delayed portfolio adjustment by investors can address six such puzzles of exchange rate movements. The findings show that slowness in the reactions of investors has the potential to influence asset prices.

https://voxeu.org/article/puzzling-exchange-rate-dynamics-and-delayed-portfolio-adjustment

Philippe Bacchetta, Eric van Wincoop

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