The Forward Premium Puzzle only emerges gradually
AbstractThe forward premium puzzle (FPP) is the negative correlation between the forward premium and the realized exchange rate return at maturities of a month and beyond. Some recent evidence shows that at maturities of multiple years and at the highest intra day frequency the correlation is positive and close to one. This paper contributes by using futures data instead of forwards to complete the maturity spectrum at the (multi-) day level. We find that the correlation only slowly turns negative as the number of days to maturity is increased to the monthly level. The typical shape of the premium correlation with regard to the forward maturity length appears to be V-shaped.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-033/2.
Date of creation: 29 Mar 2007
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Web page: http://www.tinbergen.nl
exchange rates; market efficiency; forward premium puzzle; uncovered interest parity; futures rates;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-14 (All new papers)
- NEP-CBA-2007-04-14 (Central Banking)
- NEP-IFN-2007-04-14 (International Finance)
- NEP-MST-2007-04-14 (Market Microstructure)
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.:
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