Does the Forward Premium/Discount Help to Predict the Future Change in the Exchange Rate?
This paper reexamines the relationship between the spot exchange rate depreciation and the forward premium. Many researchers report a negative, and occasionally significant, coefficient when the spot depreciation is regressed on the forward premium. The authors' analysis reveals that such findings are due to the presence of structural breaks and/or outliers in the data. After allowing for these, the forward premium has no information at all about the future change in the spot exchange rate. This finding is a direct implication of the spot rate being, approximately, a random walk and the covered interest parity holding. Copyright 1992 by Scottish Economic Society.
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Volume (Year): 39 (1992)
Issue (Month): 2 (May)
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