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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.

Suggested Citation

  • Jun Nagayasu, 2013. "The forward premium puzzle and the euro," Working Papers 1317, University of Strathclyde Business School, Department of Economics.
    • Handle: RePEc:str:wpaper:1317
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    References listed on IDEAS

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    2. Kumar, Vikram, 2020. "Liquidity shocks: A new solution to the forward premium puzzle," Economic Modelling, Elsevier, vol. 91(C), pages 445-454.

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    More about this item

    Keywords

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

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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