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What Drives Forward Premia in Indian Forex Market?

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  • Anil Kumar Sharma
  • Anujit Mitra

Abstract

This paper explores the behaviour of the forward premia for US$ vis-Ã -vis INR during the five-year period of September 2000 to September 2005. Indian forex market experienced a peculiar phenomenon in the years 2003 and 2004 where the forward premia on US$ spot (cash) vis-Ã -vis Indian rupee became negative. This phenomenon was somewhat uncommon to Indian forex market wherein Indian rupee was always at discount to US$ in the past. The paper tests hypothesis of uncovered interest rate parity in the context of Indian market. [RBI Occasional Papers, 2006]

Suggested Citation

  • Anil Kumar Sharma & Anujit Mitra, 2007. "What Drives Forward Premia in Indian Forex Market?," Working Papers id:795, eSocialSciences.
    • Handle: RePEc:ess:wpaper:id:795
    Note: Institutional Papers
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    References listed on IDEAS

    as
    1. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    2. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-636, September.
    3. Mark, Nelson C & Wu, Yangru, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Economic Journal, Royal Economic Society, vol. 108(451), pages 1686-1706, November.
    4. Geweke, John F & Feige, Edgar L, 1979. "Some Joint Tests of the Efficiency of Markets for Forward Foreign Exchange," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 334-341, August.
    5. Wang, Peijie & Jones, Trefor, 2002. "Testing for efficiency and rationality in foreign exchange markets--a review of the literature and research on foreign exchange market efficiency and rationality with comments," Journal of International Money and Finance, Elsevier, vol. 21(2), pages 223-239, April.
    6. Frenkel, Jacob A, 1977. "The Forward Exchange Rate, Expectations, and the Demand for Money: The German Hyperinflation," American Economic Review, American Economic Association, vol. 67(4), pages 653-670, September.
    7. Robert P. Flood & Andrew K. Rose, 2002. "Uncovered Interest Parity in Crisis," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 1-6.
    8. Phillips, P C B, 1991. "Error Correction and Long-Run Equilibrium in Continuous Time," Econometrica, Econometric Society, vol. 59(4), pages 967-980, July.
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