The Term Structure of Forward Exchange Premia and the Forecastability of Spot Exchange Rates: Correcting the Errors
This paper challenges the widespread view that forward exchange premia contain little information regarding subsequent spot rate movements. Using weekly dollar/Deutschmark and dollar/sterling data, we show that spot and forward exchange rates are well represented by a vector error correction model and that the vector of forward premia form a basis for the cointegrating space. Dynamic forecasts indicate that the information in the forward premia can be used to reduce the root mean squared forecast error for the spot rate (relative to a random walk forecast) by at least 33% at a six-month horizon and by between 50% and 90% at a one-year horizon.
|Date of creation:||Jun 1993|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990.
"Speculative Dynamics And The Role Of Feedback Traders,"
545, Massachusetts Institute of Technology (MIT), Department of Economics.
- Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
- David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics and the Role of Feedback Traders," NBER Working Papers 3243, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:773. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.