The New Fama Puzzle

We re-examine the Fama (1984) puzzle – the finding that ex post depreciation and
interest differentials are negatively correlated, contrary to what theory suggests – for
eight advanced country exchange rates against the US dollar, over the period up to
February 2016. The rejection of the joint hypothesis of uncovered interest parity (UIP)
and rational expectations – sometimes called the unbiasedness hypothesis – still occurs,
but with much less frequency. Strikingly, in contrast to earlier findings, the Fama
regression coefficient is positive and large in the period after the global financial crisis.
However, using survey based measures of exchange rate expectations, we find much
greater evidence in favor of UIP. Hence, the main story for the switch in Fama
coefficients in the wake of the global financial crisis is mostly – but not entirely – a
change in how expectations errors and interest differentials co-move, though the risk
premium also plays a critical role for safe haven currencies (Japanese yen and Swiss


  • Series: La Follette School Working Paper No. 2018-007
  • Authors: Matthieu Bussière, Menzie Chinn, Laurent Ferrara, Jonas Heipertz

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