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The Forward Premium Puzzle And Risk Premiums

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  • Nagayasu, Jun

Abstract

This paper re-evaluates the forward premium puzzle using the Euro/US dollar exchange rate. Unlike previous studies, a state-space model is used to measure the significance of this puzzle by estimating the time-specific parameter. Then we provide evidence that the forward premium puzzle became more prominent around the time of the Lehman Shock, and this additional effect of the puzzle is more clearly seen in longer maturity assets. Furthermore, while the risk premium does not tell the whole story about the time-varying puzzle, we show nevertheless that the puzzle can be lessened by this extra factor particularly at times of financial crises.

Suggested Citation

  • Nagayasu, Jun, 2012. "The Forward Premium Puzzle And Risk Premiums," MPRA Paper 42472, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:42472
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    References listed on IDEAS

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    More about this item

    Keywords

    forward premium puzzle; risk premium; time-varying parameters; financial crises;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance

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