Topic 4: Uncertainty and financial markets

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Topic 4 Uncertainty and financial markets

• Foreign exchange forward premium puzzle
• Froot and Thaler (1990) Anomalies Foreign
  Exchange, Journal of Economic Perspectives
• Obstfeld and Rogoff, 8.7.5
• Home bias in international equity markets

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Forward premium puzzle

• Possible explanations
• Risk premia (see class notes)
• Expectations errors (e.g. Peso problem)