Chakraborty, Avik, 1975-Haynes, Stephen E., 1945-2005-12-152005-12-152005-09-15https://hdl.handle.net/1794/192823 p.This paper explores from a new perspective the forward premium puzzle, i.e., why a regression of the change in the future spot exchange rate on the forward premium paradoxically yields a coefficient that is frequently negative. This traditional specification is compared theoretically and empirically to a "level" regression of the future spot rate on the current forward rate, which does not display the puzzle. We explore both non-rationality and risk premium explanations. The general conclusionis that, with non-rationality, any modest deviation from unity in the level coefficient becomes greatly magnified in the forward premium coefficient because of the stationary/nonstationary properties of the relevant variables, thereby generating the puzzle.174479 bytesapplication/pdfen-USForward premium puzzleSpot and forward exchange ratesForeign exchange market efficiencyNon-rationality in foreign exchange marketsWorking Paper