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The Forward Premium Puzzle and The Euro

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  • Jun, Nagayasu

Abstract

This paper evaluates the forward premium puzzle using the Euro exchange rate. Unlike previous studies, our analysis utilizes time-varying parameter methods and is based on two approaches for evaluation of the puzzle; the traditional approach analyzing the sensitivity of interest rate differentials to the forward premium, and the other looking into deviations from the covered interest rate parity (CIRP) condition. Then we provide evidence that the forward premium puzzle indeed became more prominent around the time of the recent crisis periods such as the Lehman Shock and the Euro crisis. This is also shown to be consistent with a deterioration in the CIRP.

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File URL: http://repo.sire.ac.uk/handle/10943/490
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-65.

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Date of creation: 2013
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Handle: RePEc:edn:sirdps:490

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Keywords: forward premium puzzle; risk premium; time-varying parameters; financial crises;

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  18. Peel, David A & Taylor, Mark P, 2002. "Covered Interest Rate Arbitrage in the Interwar Period and the Keynes-Einzig Conjecture," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 51-75, February.
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