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The forward premium puzzle and the euro

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  • Jun Nagayasu

    (Faculty of engineering, information & systems, University of Tskuba)

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://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/2013/13-17FINAL.pdf
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Bibliographic Info

Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1317.

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Length: 26 pages
Date of creation: Aug 2013
Date of revision:
Publication status: Published
Handle: RePEc:str:wpaper:1317

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

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  2. Frankel, Jeffrey A. & Poonawala, Jumana, 2009. "The Forward Market in Emerging Currencies: Less Biased than in Major Currencies," Scholarly Articles 4448888, Harvard Kennedy School of Government.
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  5. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
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  17. Bruce E. Hansen, 1995. "Approximate Asymptotic P-Values for Structural Change Tests," Boston College Working Papers in Economics 297., Boston College Department of Economics.
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  21. Jun Nagayasu, 2011. "The Common Component in Forward Premiums: Evidence from the Asia–Pacific Region," Review of International Economics, Wiley Blackwell, vol. 19(4), pages 750-762, 09.
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