01937cam a22002897 4500001000700000003000500007005001700012008004100029100002100070245014600091260006600237490004200303500001600345520071600361530006101077538007201138538003601210690006601246690008101312700001501393700002401408700002101432710004201453830007701495856003801572856003701610w15866NBER20150422003027.0150422s2010 mau||||fs|||| 000 0 eng d1 aBurnside, Craig.10aInvestor Overconfidence and the Forward Premium Puzzleh[electronic resource] /cCraig Burnside, Bing Han, David Hirshleifer, Tracy Yue Wang. aCambridge, Mass.bNational Bureau of Economic Researchc2010.1 aNBER working paper seriesvno. w15866 aApril 2010.3 aWe offer an explanation for the forward premium puzzle in foreign exchange markets based upon investor overconfidence. In the model, overconfident individuals overreact to their information about future inflation, which causes greater overshooting in the forward rate than in the spot rate. Thus, when agents observe a signal of higher future inflation, the consequent rise in the forward premium predicts a subsequent downward correction of the spot rate. The model can explain the magnitude of the forward premium bias and several other stylized facts related to the joint behavior of forward and spot exchange rates. Our approach is also consistent with the availability of profitable carry trade strategies. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aF31 - Foreign Exchange2Journal of Economic Literature class. 7aG15 - International Financial Markets2Journal of Economic Literature class.1 aHan, Bing.1 aHirshleifer, David.1 aWang, Tracy Yue.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w15866.4 uhttp://www.nber.org/papers/w1586641uhttp://dx.doi.org/10.3386/w15866