PUZZLES IN INTERNATIONAL FINANCIAL MARKETS
ABSTRACT
This paper presents a review of two basic puzzles in international finance. The first puzzle is the “predictable excess return puzzle”. This puzzle is the empirical failure or what is known as the uncovered interest rate parity (UIP). Thus, the above puzzle can be restated as the forward premium anomaly in which future exchange rate movements are predicted with the wrong sign. The second puzzle is the “home bias puzzle “this involves the persistent home bias in international evidence shows that domestic residents do not diversify sufficiency into foreign stocks.
