Inflation,currency exchange rates,and the international securities markets |
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Authors: | Wilbur G Lewellen James S Ang |
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Institution: | Purdue University, West Lafayette, IN, USA;Florida State University, USA |
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Abstract: | A time-state-preference model of an efficient and complete international financial market is employed to investigate the conditions under which the international Fisher Effect will hold, and the forward currency exchange rate will be an unbiased estimate of the future spot rate. The presence of stochastic inflation within countries in the fiat-currency prices of real goods will destroy both relationships, even in the absence of any institutional imperfections or trading barriers. Similarly, expected inflation rate differentials across countries will not coincide with spot-versus-forward currency exchange rate differentials. |
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Keywords: | Address correspondence to Wilbur G Lewellen Krannert Graduate School of Management Purdue University West Lafayette IN 47907 USA |
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