Nagayasu, Jun (2012): The Forward Premium Puzzle And Risk Premiums.
Download (181kB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||The Forward Premium Puzzle And Risk Premiums|
|Keywords:||forward premium puzzle; risk premium, time-varying parameters; financial crises|
|Subjects:||F - International Economics > F3 - International Finance|
|Depositing User:||Nagayasu Jun|
|Date Deposited:||06 Nov 2012 11:23|
|Last Modified:||02 Mar 2017 16:40|
Bacchetta, P. & van Wincoop, E. (2010). Infrequent Portfolio Decisions: A Solution to the Forward Discount Puzzle. American Economic Review, 100(3), 870–904.
Bank for International Settlements (2010). Triennial central bank survey: Report on global foreign exchange market activity in 2010.
Bansal, R. & Dahlquist, M. (2000). The forward premium puzzle: different tales from developed and developing economies. Journal of International Economics 51, 115-144.
Burnside, C., Eichenbaum, M. & Rebelo, S. (2009) Understanding the forward premium puzzle: a microstructure approach. American Economic Journal: Macroeconomics 1(2), 127–54.
Byrne, J. P. & Nagayasu, J. (2012). Common factors of the exchange risk premium in emerging European markets. Bulletin of Economic Research, forthcoming.
Chicago Board Options Exchange (2009). The CBOE volatility index-VIX.
Chinn, M. D. & Meredith, G., 2004, Monetary policy and long-horizon uncovered interest parity. IMF Staff Papers 51, 409-430.
Coffey, N., Hrung, W. B. & Sarkar, A. (2009). Capital constraints, counterparty risk, and deviations from the covered interest rate parity. Federal Reserve Bank of New York Staff Report no. 393.
Davies, R. B. (1987). Hypothesis testing when a nuisance parameter is present only under the alternative. Biometrika 74, 33-43.
Eichenbaum, M. & Evans, C. L. (1995). Some empirical evidence on the effects of shocks to monetary policy on exchange rates. Quarterly Journal of Economics 110, 975-1009.
Engel, C. (1996). The forward discount anomaly and the risk premium: a survey of recent evidence. Journal of Empirical Finance 3, 123-192.
Engle, R. F., Lilien, D. M. & Robins, R. P. (1987). Estimating time varying risk premia in the term structure: the Arch-M model. Econometrica 55, 391-407.
Evans, M. D. D. & Lyons, R. K. (2002). Order flow and exchange rate dynamics. Journal of Political Economy 110, 170-180.
Fama, E. F. (1984). Forward and spot exchange rates. Journal of Monetary Economics 14, 319-338.
Frankel, J. A. (1992). Measuring international capital mobility: a review. American Economic Review 82, 197-202.
Frankel, J. & Poonawala, J. (2010). The forward market in emerging currencies: less biased than in major currencies. Journal of International Money and Finance 29, 585-598.
Froot, K. A. & Frankel, J. F. (1989). Forward discount bias: is it an exchange risk premium? Quarterly Journal of Economics 139-161.
Froot, K. A. & Thaler, R. H. (1990). Anomalies: foreign exchange. Journal of Economic Perspective 4(3), 179-192.
Griffoli, T. M. & Ronaldo, A. (2011). Limits to arbitrage during the crisis: funding liquidity constraints and covered interest parity, Working Paper.
Hansen, B. E. (1997). Approximate asymptotic p values for structural-change tests. Journal of Business & Economic Statistics 15(1), 60-67.
Hall, S. G., Swamy, P. A. V. B., Tavlas, G. S., & Kenjegaliev, A. (2011). The forward premium puzzle: a resolution, University of Leicester, Economics Department, Working Paper No. 11/23.
Kim, C-J. (1994). Dynamic linear models with Markov-Switching. Journal of Econometrics 60, 1-22.
Kocenda, E. & Poghosyan, T. (2009). Macroeconomic sources of foreign exchange risk in new EU members. Journal of Banking & Finance 33, 2164-2173.
Levich, R. M. (2011). Evidence on financial globalization and crises: interest rate parity, In the Encyclopedia of Financial Globalization, ed. Gerard Caprio, Elsevier Publishing Inc., forthcoming.
Lusting, H. & Verdelhan, A. (2007). The cross section of foreign currency risk premia and consumption growth risk. American Economic Review 97, 89-117.
MacDonald, R. & Torrance, T. S. (1990). Expectations formation and risk in four foreign exchange markets. Oxford Economic Papers, 42(3), 544-561.
Nagayasu, J. (2011). The common component in forward premiums: evidence from the Asia-Pacific region. Review of International Economics 19(4), 750-762.
Taylor, M. P. (1989). Covered interest arbitrage and market turbulence. Economic Journal 99, 376-391.