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The forward premium puzzle and the euro

  • Jun Nagayasu

    (Faculty of engineering, information & systems, University of Tskuba)

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.

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File URL: http://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/research/researchdiscussionpapers/2013/13-17FINAL.pdf
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Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1317.

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Length: 26 pages
Date of creation: Aug 2013
Date of revision:
Publication status: Published
Handle: RePEc:str:wpaper:1317
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  19. Raymond, Jennie E & Rich, Robert W, 1997. "Oil and the Macroeconomy: A Markov State-Switching Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 193-213, May.
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