Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2007-03-29
Number: 07-033/2
Author-Name: Kerstin Bernoth
Author-Email: k.bernoth@dnb.nl
Author-Workplace-Name: De Nederlandsche Bank, and ZEI-University of Bonn
Author-Name: Jürgen von Hagen
Author-Email: vonhagen@uni-bonn.de
Author-Workplace-Name: University of Bonn, Indiana University, and CEPR
Author-Name: Casper G. de Vries
Author-Email: cdevries@few.eur.nl
Author-Workplace-Name: Erasmus Universiteit Rotterdam
Title: The Forward Premium Puzzle only emerges gradually
Abstract: The forward premium puzzle (FPP) is the negative correlation between the forward premium and the realized exchange rate return at maturities of a month and beyond. Some recent evidence shows that at maturities of multiple years and at the highest intra day frequency the correlation is positive and close to one. This paper contributes by using futures data instead of forwards to complete the maturity spectrum at the (multi-) day level. We find that the correlation only slowly turns negative as the number of days to maturity is increased to the monthly level. The typical shape of the premium correlation with regard to the forward maturity length appears to be V-shaped.
Classification-JEL: F31; F37; G13
Keywords: exchange rates; market efficiency; forward premium puzzle; uncovered interest parity; futures rates
File-Url: https://papers.tinbergen.nl/07033.pdf
File-Format: application/pdf
File-Size: 268673 bytes
Handle: RePEc:tin:wpaper:20070033