The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly
33 Pages Posted: 3 Nov 2008
There are 5 versions of this paper
The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly
The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly
The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly
The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly
The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly
Date Written: November 2005
Abstract
The forward premium anomaly is one of the most robust puzzles in financial economics. We recast the underlying parity relation in terms of cross-country differences between forward interest rates rather than spot interest rates with dramatic results. These forward interest rate differentials have statistically and economically significant forecast power for annual exchange rate movements, both in- and out-of-sample, and the signs and magnitudes of the corresponding coefficients are consistent with economic theory. Forward interest rates also forecast future spot interest rates and future inflation. Thus, we attribute much of the forward premium anomaly to the anomalous behavior of short term interest rates, not to a breakdown of the link between fundamentals and exchange rates.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Returns to Currency Speculation
By A. Craig Burnside, Martin Eichenbaum, ...
-
The Returns to Currency Speculation
By A. Craig Burnside, Martin Eichenbaum, ...
-
The Cross-Section of Currency Risk Premia and Us Consumption Growth Risk
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply
By Hanno N. Lustig and Adrien Verdelhan
-
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk: A Reply
By Hanno N. Lustig and Adrien Verdelhan
-
Carry Trades and Currency Crashes
By Markus K. Brunnermeier, Stefan Nagel, ...