Understanding Asset Values: Stock Prices, Exchange Rates, and the "Peso Problem"

1. What is a "peso problem" and why is it important? How is the term thought to have originated?

2. What are the characteristics of a "good" forecast? How are forecasts affected by peso problems?

3. Describe the forward premium puzzle in foreign exchange markets. What does the peso problem contribute to understanding this puzzle?

4. How does the notion of "regime switching" help explain the existence of peso problems?

5. How can peso problems and regime switching influence stock price behavior?

Source: "Understanding Asset Values: Stock Prices, Exchange Rates, and the 'Peso Problem.'" Keith Sill, Federal Reserve Bank of Philadelphia Business Review, September/October 2000, pp. 3-13.