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| Avik Chakraborty and Stephen E. Haynes |
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| ''Econometrics of the Forward Premium Puzzle'' |
| ( 2008, Vol. 6 No.42 ) |
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| This paper compares the "level" regression of the future spot rate on the current forward rate, which yields a slope coefficient close to unity, to the forward premium puzzle, i.e., a regression of the change in the spot exchange rate on the forward premium, which paradoxically yields a slope coefficient that is frequently negative. We argue that the striking difference between these two otherwise equivalent regressions follows from the existence of a bias together with the non-stationarity of underlying variables. In addition, we contend that non-rationality may potentially explain the existence of the bias that generates the forward premium puzzle. |
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| Keywords: Forward premium puzzle |
JEL:
F3 - International Finance: General |
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| Manuscript Received : Oct 01 2008 | | Manuscript Accepted : Oct 07 2008 |
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