Is the forward premium puzzle universal?
The forward premium puzzle, or violation of the uncovered interest rate parity (UIP), has been documented by many. Studies, using methodologies more sophisticated than regression analysis, tend to suggest that the rejection of UIP may be false, due to cointegration, biased parameter estimates, time-varying risk premium, etc. In this study, from data for the two decades (1979-1998) and nine major currencies of the developed world, it is shown that the forward premium puzzle is not always present for any arbitrary time period, or for any pair of countries, even using the regression analysis that established the puzzle in earlier works.
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Volume (Year): 11 (2004)
Issue (Month): 2 ()
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References listed on IDEAS
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- MacDonald, Ronald & Taylor, Mark P., 1989. "Foreign exchange market efficiency and cointegration : Some evidence from the recent float," Economics Letters, Elsevier, vol. 29(1), pages 63-68.
- Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
- Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-38, April.
- Frenkel, Jacob A & Levich, Richard M, 1977. "Transaction Costs and Interest Arbitrage: Tranquil versus Turbulent Periods," Journal of Political Economy, University of Chicago Press, vol. 85(6), pages 1209-26, December.
- Cumby, Robert E & Obstfeld, Maurice, 1981. "A Note on Exchange-Rate Expectations and Nominal Interest Differentials: A Test of the Fisher Hypothesis," Journal of Finance, American Finance Association, vol. 36(3), pages 697-703, June.
- Taylor, Mark P, 1987. "Covered Interest Parity: A High-Frequency, High-Quality Data Study," Economica, London School of Economics and Political Science, vol. 54(216), pages 429-38, November.
- Razzaque Bhatti & Imad Moosa, 1995. "An alternative approach to testing uncovered interest parity," Applied Economics Letters, Taylor & Francis Journals, vol. 2(12), pages 478-481.
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