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Trend shifts in the forward premium and the predictability of excess returns in currency markets

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  • Dooyeon Cho
  • Sungju Chun

Abstract

This article provides evidence that the forward premium involves structural changes in the trend function, which might affect the predictability of currency excess returns to be dependent on the choice of the sample period. Accounting for the shifts in trend for the forward premium reveals that currency excess returns for the Canadian dollar, Swiss franc, euro and pound against the US dollar are significantly predictable irrespective of the sample period selected. Another advantage of detrending the forward premium is that we can obtain more consistent slope coefficient estimates in the predictive regression, which enables us to make more consistent, dependable inferences about the excess return predictability.

Suggested Citation

  • Dooyeon Cho & Sungju Chun, 2017. "Trend shifts in the forward premium and the predictability of excess returns in currency markets," Applied Economics, Taylor & Francis Journals, vol. 49(18), pages 1821-1832, April.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:18:p:1821-1832
    DOI: 10.1080/00036846.2016.1226493
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    Cited by:

    1. Cho, Dooyeon, 2018. "On the persistence of the forward premium in the joint presence of nonlinearity, asymmetry, and structural changes," Economic Modelling, Elsevier, vol. 70(C), pages 310-319.
    2. Cho, Dooyeon & Chun, Sungju, 2019. "Can structural changes in the persistence of the forward premium explain the forward premium anomaly?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 58(C), pages 225-235.

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