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A re-examination of the predicting power of forward premia

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  • Peijie Wang

Abstract

The paper proposes that the spot exchange rate consist of two parts. Important information content is with its underlying movement, in accordance with the development in the economy and the adjustment in economic activity. The paper then extracts the underlying movement from the spot exchange rate using the state space method and the frequency domain method. The extracted component is persistent as expected, catching trend movement and matching the statistical characteristics of the forward premium to some degree. Based on the results, the paper is able to reject the finding in many previous studies that the forward premium predicts the future spot rate in a completely wrong way. The paper concludes that the forward premium does not help explain the future spot rate as its most feasible result.

Suggested Citation

  • Peijie Wang, 2005. "A re-examination of the predicting power of forward premia," Applied Financial Economics, Taylor & Francis Journals, vol. 15(17), pages 1219-1225.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:17:p:1219-1225
    DOI: 10.1080/09603100500360920
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    Cited by:

    1. Abdulnasser Hatemi-J & Eduardo Roca, 2012. "A re-examination of the unbiased forward rate hypothesis in the presence of multiple unknown structural breaks," Applied Economics, Taylor & Francis Journals, vol. 44(11), pages 1443-1448, April.

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