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Do forward premium rates predict the spot rates? Comparison of developed and emerging economies

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  • Wajid Shakeel Ahmed
  • Shoaib Khattak
  • Ijlal Ahmed

Abstract

The study inquires the role of forward premium rates as a predictor for the respective currency spot rates. The data comprises of developing and developed 16 countries' currencies of daily spot rates and forward premium rates of 30, 90, 180 and 360 days by extending the work of Della Corte, Sarno and Tsiakas (2009). The study proposes the model of predictable time series in nature to test for the heteroscedasticity in respective categories of forward premium rates, for example, heteroscedastic forward premium model (H‐FPM). The results are encouraging and support that forward premiums have information that can be possibly utilized by investors for generating profits. Moreover, the predictive time series model observes that there exists a degree of concordance in results from in‐sample and out‐of‐sample (OOS_R2) statistical tests. The study finds that the (H‐FPM) dominates the symmetric‐mean model (S‐MM) and thus promises more profit incentivised benefits for investors. The study not only add knowledge to the previous study work in relation to predictability of the currencies spot rates through forward premium rates but also incorporate heteroscedasticity, endogeneity and persistency issues that lacks in past empirical studies.

Suggested Citation

  • Wajid Shakeel Ahmed & Shoaib Khattak & Ijlal Ahmed, 2023. "Do forward premium rates predict the spot rates? Comparison of developed and emerging economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 2178-2187, April.
    • Handle: RePEc:wly:ijfiec:v:28:y:2023:i:2:p:2178-2187
    DOI: 10.1002/ijfe.2531
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