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Predicting exchange rate returns

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  • Narayan, Paresh Kumar
  • Sharma, Susan Sunila
  • Phan, Dinh Hoang Bach
  • Liu, Guangqiang

Abstract

We test whether forward premiums predict spot exchange rate returns for 16 currencies. We apply a recently developed time series predictability test that allows us to model data features including heteroskedasticity in forward premium. We discover return predictability for 75% (12/16) of currencies in our sample. Trading strategies show that investors can make more profits from our proposed forward premium model compared to a random walk model and foreign exchange carry trade model.

Suggested Citation

  • Narayan, Paresh Kumar & Sharma, Susan Sunila & Phan, Dinh Hoang Bach & Liu, Guangqiang, 2020. "Predicting exchange rate returns," Emerging Markets Review, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:ememar:v:42:y:2020:i:c:s1566014119303504
    DOI: 10.1016/j.ememar.2019.100668
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