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Forecasting Currency Excess Returns: Can the Forward Bias Be Exploited?

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Author Info
Villanueva, O. Miguel
Abstract

The forward bias anomaly implies that currency excess returns are predictable by the forward premium. Yet, recent studies suggest that statistical inference problems may spuriously account for this predictability. This article demonstrates that while currency excess returns are not predictable out of sample using a standard mean square forecast error criterion, the forward premium nonetheless has directional predictability. This directional forecasting accuracy translates into statistically significant profits from trading on the forward bias anomaly.

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 42 (2007)
Issue (Month): 04 (December)
Pages: 963-990
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:jfinqa:v:42:y:2007:i:04:p:963-990_00

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  1. Christian Wagner, 2008. "Risk-Premia, Carry-Trade Dynamics, and Speculative Efficiency of Currency Markets," Working Papers 143, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  2. Zsolt Darvas, 2008. "Leveraged carry trade portfolios," Working Papers 0802, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest, revised 18 Jun 2008. [Downloadable!]
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This page was last updated on 2009-12-14.

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