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The Common Component in Forward Premiums: Evidence from the Asia–Pacific Region

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  • Jun Nagayasu

Abstract

This paper empirically analyzes the behavior of the forward premium. Unlike previous research, we use data from Asia-Pacific countries and adopt the panel data approach (Bai and Ng 2004) which allows us to decompose the forward premium into common and idiosyncratic (country-specific) components. Our data suggest the presence of one common factor and the stationarity of both common and idiosyncratic factors for short maturities, leading to the conclusion of a stationary forward premium. In contrast, the stationarity of the premium is less supported by the longer maturity data. Furthermore, a large portion of the premium fluctuation is shown to be due to a common factor, particularly over the short time horizon, which in turn can be explained by economic and financial developments in the US. In particular, when the US interest rate increases and the economy declines, the common factor tends to fall.
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  • Jun Nagayasu, 2011. "The Common Component in Forward Premiums: Evidence from the Asia–Pacific Region," Review of International Economics, Wiley Blackwell, vol. 19(4), pages 750-762, September.
    • Handle: RePEc:bla:reviec:v:19:y:2011:i:4:p:750-762
    DOI: j.1467-9396.2011.00979.x
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    Cited by:

    1. Nagayasu, Jun, 2014. "The forward premium puzzle and the Euro," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 436-451.
    2. Nagayasu, Jun, 2012. "The Forward Premium Puzzle And Risk Premiums," MPRA Paper 42472, University Library of Munich, Germany.
    3. Nagayasu, Jun, 2011. "The threshold nonstationary panel data approach to forward premiums," MPRA Paper 34265, University Library of Munich, Germany.
    4. Nagayasu, Jun, 2012. "Long-Run Implications of the Covered Interest Rate Parity Condition: Evidence during the Recent Crisis and Non-Crisis Periods," MPRA Paper 41566, University Library of Munich, Germany.

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    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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