The Term Structure of Forward Exchange Premia and the Forecastability of Spot Exchange Rates: Correcting the Errors
AbstractThis paper challenges the widespread view that forward exchange premia contain little information regarding subsequent spot rate movements. Using weekly dollar/Deutschmark and dollar/sterling data, we show that spot and forward exchange rates are well represented by a vector error correction model and that the vector of forward premia form a basis for the cointegrating space. Dynamic forecasts indicate that the information in the forward premia can be used to reduce the root mean squared forecast error for the spot rate (relative to a random walk forecast) by at least 33% at a six-month horizon and by between 50% and 90% at a one-year horizon.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 773.
Date of creation: Jun 1993
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- Richard H. Clarida & Mark P. Taylor, 1993. "The Term Structure of Forward Exchange Premia and the Forecastibility of Spot Exchange Rates: Correcting the Errors," NBER Working Papers 4442, National Bureau of Economic Research, Inc.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David M. Cutler & James M. Poterba & Lawrence H. Summers, 1991.
"Speculative Dynamics and the Role of Feedback Traders,"
NBER Working Papers
3243, National Bureau of Economic Research, Inc.
- Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
- Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics And The Role Of Feedback Traders," Working papers 545, Massachusetts Institute of Technology (MIT), Department of Economics.
- Alex Maynard & Peter C. B. Phillips, 2001. "Rethinking an old empirical puzzle: econometric evidence on the forward discount anomaly," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(6), pages 671-708.
- Sergio L. Schmukler & Luis Serven, 2002.
"Pricing Currency Risk: Facts and Puzzles from Currency Boards,"
NBER Working Papers
9047, National Bureau of Economic Research, Inc.
- Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk : facts and puzzles from currency boards," Policy Research Working Paper Series 2815, The World Bank.
- Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December.
- David W.R. Gruen & Marianne C. Gizycki, 1993.
"Explaining Forward Discount Bias: Is it Anchoring?,"
RBA Research Discussion Papers
rdp9307, Reserve Bank of Australia.
- Gruen, D.W.R. & Gizycki, M.C., 1993. "Explaining Forward Discount Bias: Is It Anchoring?," Papers 164, Princeton, Woodrow Wilson School - Public and International Affairs.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.