Econometrics of the forward premium puzzle

Show full item record

Title: Econometrics of the forward premium puzzle
Author: Chakraborty, Avik, 1975-; Haynes, Stephen E., 1945-
Abstract: 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.
Description: 23 p.
Date: 2005-09-15

Files in this item

Files Size Format View
UO-2005-18_Haynes_Forward.pdf 170.3Kb PDF View/Open

This item appears in the following Collection(s)

Show full item record