The Forward Premium Puzzle Only Emerges Gradually

19 Pages Posted: 2 Mar 2007

See all articles by Kerstin Bernoth

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin)

Jürgen von Hagen

University of Bonn - Institute of Economic Policy; Centre for Economic Policy Research (CEPR)

Casper G. de Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2007

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.

Keywords: exchange rates, market efficiency, forward premium puzzle, uncovered interest parity, futures rates

JEL Classification: F31, F37, G13

Suggested Citation

Bernoth, Kerstin and von Hagen, Jürgen and De Vries, Casper, The Forward Premium Puzzle Only Emerges Gradually (January 2007). Available at SSRN: https://ssrn.com/abstract=967298 or http://dx.doi.org/10.2139/ssrn.967298

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Jürgen Von Hagen

University of Bonn - Institute of Economic Policy ( email )

Adenauerallee 24
D-53113 Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Casper De Vries (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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