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The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies

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  • Jeffrey Frankel
  • Jumana Poonawala

Abstract

any studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate. Usually the forward discount actually points in the wrong direction. But virtually all those studies apply to advanced economies and major currencies. We apply the same tests to a sample of 14 emerging market currencies. We find a smaller bias than for advanced country currencies. The coefficient is on average positive, i.e., the forward discount at least points in the right direction. It is never significantly less than zero. To us this suggests that a time-varying exchange risk premium may not be the explanation for traditional findings of bias. The reasoning is that emerging markets are probably riskier; yet we find that the bias in their forward rates is smaller. Emerging market currencies probably have more easily-identified trends of depreciation than currencies of advanced countries.

Suggested Citation

  • Jeffrey Frankel & Jumana Poonawala, 2006. "The Forward Market in Emerging Currencies: Less Biased Than in Major Currencies," NBER Working Papers 12496, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12496
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    More about this item

    JEL classification:

    • F0 - International Economics - - General
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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